Auditor liability and the precision of auditing standards

This pager deals with the precision of auditing standards under a negligenc e liability system for auditors. Auditing standards such as, e.g., GAAS in the US or GoA in Germany provide rules for judging the auditors' due care a nd are supposed to serve both descriptive and normative purposes. In order to fulfill these functions, it is usually hypothesized that the standards m ust be made as precise as possible. This paper argues, however, that vague standards need not be detrimental. In fact, it is shown that for each preci se standard there exists a vague standard that outperforms the precise stan dard equilibrium in terms of auditing efforts, quality of the financial sta tements, costs of using the legal system, and direct as well as total audit ing costs.