This study examines whether the perceived independence and financial expertise of audit committee members affect external auditors' exposure to legal liability. We use an experiment in which potential jurors make judgments about auditor independence and legal liability for a case involving an audit failure. We find that perceptions of audit committee independence from management are positively associated with judgments of auditor independence and negatively associated with auditor liability. However, financial expertise of audit committee members can be a double‐edged sword. Our experiment finds that judgments of auditor liability are higher when the audit committee is perceived to have higher financial expertise but lower independence from management. In assessing litigation risk of current and prospective clients, auditors may want to carefully consider the independence of audit committee members from management, particularly when audit committee members have financial expertise. In the event of an audit failure, the financial expertise of nonindependent audit committee members can negatively affect jurors' perceptions of auditor independence and liability.

Regulators and the financial press have criticized credit rating agencies (CRAs) for exacerbating the financial crisis by providing overly optimistic debt ratings. Allegedly, CRAs departed from their quantitative models in order to please security issuers with higher credit ratings. In response, the Dodd-Frank Act of 2010 required the Securities and Exchange Commission to conduct a study on alternative models for compensating CRAs. We conduct an experiment exploring how the credit ratings of M.B.A. students, who assume the role of credit rating analysts, are affected by two proposals for reform: (1) changing who pays the CRAs, and (2) requiring analysts to justify departures from a quantitative model. We find that credit ratings are highest when the borrower pays CRAs for ratings and a justification requirement is not in place. Implementing either proposed reform independently reduces credit ratings, but credit ratings are not further reduced when both reforms are implemented together. Data Availability: Data are available from the authors upon request.