Auditing: A Journal of Practice & Theory
American Accounting Association
Vol. 32, No. 2
An Examination of the Legal Liability
Associated with Outsourcing and Offshoring
Alex Lyubimov, Vicky Arnold, and Steve G. Sutton
Accounting firms have steadily increased the use of outsourcing and
offshoring of professional services including independent audit procedures. While firms
suggest that the work is of higher quality and similar litigation risk, questions remain as to
whether public perceptions may be more negative. This paper examines liability
associated with an audit failure when work is performed by another office of the same
firm or outsourced to a separate firm, and whether the work is performed domestically or
in another country. Results indicate main effects for outsourcing on compensatory
damages and an interaction between outsourcing and offshoring on punitive damages.
Surprisingly, jurors assess higher than expected litigation awards for a failure by another
domestic office of the firm for punitive damages. This result suggests that the close
proximity in terms of both geography and organizational distance of the domestic office
of the firm leads jurors to find the audit failure less understandable.
indicate that potential jurors perceive that work completed by another domestic office of
the firm has the highest expected quality and lowest risk, while work that is outsourced
offshore is expected to be lowest quality and highest risk—consistent with proximity
outsourcing; offshoring; audit quality; litigation risk; juror decision-making;
auditor liability; counterfactual reasoning.
Alex Lyubimov is a Ph.D. student, and Vicky Arnold and Steve G. Sutton are both Professors, all at the
University of Central Florida
We thank Donna Bobek Schmitt, Mary Curtis, Naman Desai, Andy Dill, Craig Emby, Michael Favere-Marchesi, Don
Finn, Govind Iyer, Theresa Libby, Jeff Reinking, Jesse Robertson, Kim Zahller, workshop participants at the AAA
Auditing Section Midyear Meeting, Simon Fraser University, University of Central Florida, and University of North
Texas, and students in the Behavioral Research in Accounting Ph.D. Seminar at the University of Waterloo for their
helpful comments. We also thank Mike Bamber (associate editor) and two anonymous reviewers for their helpful
comments. We thank Kathryn Kadous and Jordan Lowe for giving us permission to use portions of their instruments for
this study, and Charles Lako for providing legal insight regarding the instrument.
Editor’s note: Accepted by E. Michael Bamber.
Submitted: April 2011
Accepted: October 2012
Published Online: November 2012