No Good Deed Goes Unpunished? Recent Evidence on the Effects of Identifying and Investigating Fraud Risks on Auditors' Litigation Exposure

SUMMARY Statement on Auditing Standard No. 99 requires audit team members (staff through partner) during the planning stage of an audit to identify general and specific fraud risks they believe are potentially present within their client's organization, assess the severity of the identified risks, and modify their audit procedures accordingly. While regulators believe such actions will help auditors detect fraud, several publications contend that identifying and investigating fraud risks could, in certain circumstances, also increase auditors' litigation exposure. A recent study, “Can Identifying and Investigating Fraud Risks Increase Auditors' Liability” (Reffett 2010), provides empirical evidence that supports these concerns. This article summarizes that study by discussing its motivation, method, results, and implications. The current article then considers several important questions the aforementioned study raises regarding the effects of the current legal system on the audit process.