A student asked the following questions on Weber et al (2008). Please answer her questions to the best of your ability. These are very good questions for a non-auditor business-person to ask. However, by now you should be in the position to be able to answer the second question. As for the first question, there is a correct answer which is required for full credit, but I will award B credit for any answer that is reasoned and shows an understanding of Weber et al.

Weber, J. Willenborg, M., and Zhan, J. (2008). Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG. Journal of Accounting Research Vol. 46 No. 4 September, 941-972.

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1. On page 942, it talks about Germany setting a 4 million euro limit for litigations. But I don’t understand how it’s a “clean test of the reputation rationale for audit quality”? In my understanding, if there is a limit for liability, then the auditing firm can get away with huge misrepresentation and just pay 4 million, as opposed to a much larger sum.

2. It also states that “auditors are unlikely to be a source of much insurance to the investors”, which confuses me because I don’t understand on what financial statements are the investors are supposed to rely on?

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