Vague Auditing Standards and Ambiguity Aversion

SUMMARY I model unilateral auditor liability under the assumption that the auditor has an aversion to uncertainty about probability (ambiguity aversion). A vaguely defined negligence standard implies an ambiguity situation. There are two characteristics of ambiguity aversion: pessimism and likelihood insensitivity. The former improves the auditor's overall incentives to avoid the worst outcome possible (certainty effect). The latter impairs the...