Auditors’ Liability and Prospect Theory
This paper analyzes unilateral auditors’ liability assuming that the auditor has preferences according to Prospect Theory, thus, it considers loss aversion, risk-seeking behaviour with losses and weighting of probabilities. Compared to an Expected Utility maximizer the auditor has less incentives to take care under Prospect Theory when there is strict liability or negligence with a precise standard of due care. With a vague standard of due care results are mixed. With Prospect Theory, a negligence rule induces
less distortions than a strict liability regime.