Audit Partner Perceptions of Post-Audit Review Mechanisms: An Examination of Internal Quality Reviews and PCAOB Inspections

2012 ◽  
Vol 27 (1) ◽  
pp. 23-49 ◽  
Author(s):  
Richard W. Houston ◽  
Chad M. Stefaniak
Keyword(s):  
Audit Quality ◽  
Academic Research ◽  
Internal Quality ◽  
Litigation Risk ◽  
Accounting Firms ◽  
Audit Review ◽  
Public Company ◽  
Perceived Effects ◽  
Partner Perceptions ◽  
And Behavior

SYNOPSIS This study reports the results of a survey of 107 audit partners from large public accounting firms that investigates and compares partner perceptions of Public Company Accounting Oversight Board (PCAOB) inspections' and Internal Quality Reviews (IQRs): (1) predictability, (2) conduct, (3) reviewer qualifications and behavior, and (4) effects (i.e., on audits, partners, and firms). A majority of partners can or try to predict the year of both reviews and perceive that, relative to PCAOB inspections, IQR reviewers have a better understanding of firms' audit methodologies, IQRs focus more on whether firms follow their methodology, and IQRs examine more audit areas. In addition, partners believe that PCAOB inspectors are more focused on finding deficiencies than are IQR reviewers, and that IQR feedback is more timely and helpful for improving audit quality. Both reviews are perceived to impact professional reputation; however, partners perceive that PCAOB inspections increase their firms' litigation risk more so than do IQRs. Finally, less experienced partners perceive reviews as more invasive and as posing more consequences than do more experienced partners. We provide credible, informed perceptions of partners directly involved in both PCAOB inspections and IQRs (which heretofore have not been examined directly by practitioner or academic research) that should be beneficial to accounting researchers, practicing auditors, and regulatory bodies interested in understanding the perceived effects and effectiveness of PCAOB inspections and IQRs.

Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB Rulemaking Docket Matter No. 31: PCAOB Release No. 2010-005, Application of the “Failure to Supervise” Provision of the Sarbanes-Oxley Act of 2002 and Solicitation of Comment on Rulemaking Concepts

2011 ◽  
Vol 5 (1) ◽  
pp. C11-C15 ◽  
Author(s):  
Joseph Brazel ◽  
James Bierstaker ◽  
Paul Caster ◽  
Brad Reed
Keyword(s):  
Audit Quality ◽  
Exposure Period ◽  
Public Accounting ◽  
Accounting Firms ◽  
Accounting Firm ◽  
The Public ◽  
Sarbanes Oxley ◽  
Public Company ◽  
Auditing Standards ◽  
Supervision Practices

SUMMARY: Recently, the Public Company Accounting Oversight Board (“PCAOB” or “Board”) issued a release to address, in two ways, issues relating to the responsibilities of a registered public accounting firm and its supervisory personnel with respect to supervision. First, the release reminds registered firms and associated persons of, and highlights the scope of, Section 105(c)(6) of the Sarbanes-Oxley Act of 2002 (“the Act”), which authorizes the Board to impose sanctions on registered public accounting firms and their supervisory personnel for failing to supervise reasonably an associated person who has violated certain laws, rules, or standards. Second, the release discusses and seeks comment on conceptual approaches to rulemaking that might complement the application of Section 105(c)(6) and, through increased accountability, lead to improved supervision practices and, consequently, improved audit quality. The PCAOB provided for a 91-day exposure period (from August 5, 2010, to November 3, 2010) for interested parties to examine and provide comments on the conceptual approaches to rulemaking that might complement the application of Section 105(c)(6). The Auditing Standards Committee of the Auditing Section of the American Accounting Association provided the comments in the letter below to the PCAOB on the PCAOB Release No. 2010-005, Application of the “Failure to Supervise” Provision of the Sarbanes-Oxley Act of 2002 and Solicitation of Comment on Rulemaking Concepts.

PCAOB International Inspections and Audit Quality

2016 ◽  
Vol 92 (5) ◽  
pp. 143-166 ◽  
Author(s):  
Jagan Krishnan ◽  
Jayanthi Krishnan ◽  
Hakjoon Song
Keyword(s):  
Audit Quality ◽  
Value Relevance ◽  
Accounting Firms ◽  
The Public ◽  
Public Company ◽  
Accounting Numbers ◽  
Abnormal Accruals ◽  
Relevance Measure ◽  
The Impact ◽  
First Time

ABSTRACT We investigate the impact of the Public Company Accounting Oversight Board's (PCAOB) first-time inspections of foreign accounting firms by examining abnormal accruals around the inspection year, and the value relevance of accounting numbers around the inspection report date, for their U.S. cross-listed clients. We document lower abnormal accruals in the post-inspection period, and greater value relevance of accounting numbers in the post-report period for clients of the inspected auditors, compared with non-cross-listed clients or clients of non-inspected auditors within the inspected countries. Comparisons of the PCAOB's joint inspections with PCAOB stand-alone inspections indicate that while both experience lower post-inspection abnormal accruals, the former benefit more than the latter. The value relevance measure, in contrast, shows greater increases for the PCAOB stand-alone inspections than for joint inspections. Comparing the inspection effects for auditors with and without deficiency reports, we find no systematic differences for accruals or for value relevance.

scholarly journals Audit Quality: Insights from the Academic Literature

2012 ◽  
Vol 32 (Supplement 1) ◽  
pp. 385-421 ◽  
Author(s):  
W. Robert Knechel ◽  
Gopal V. Krishnan ◽  
Mikhail Pevzner ◽  
Lori B. Shefchik ◽  
Uma K. Velury
Keyword(s):  
Audit Quality ◽  
Academic Research ◽  
Future Research ◽  
The Public ◽  
Academic Literature ◽  
Public Company

SUMMARY This study presents a review of academic research on audit quality. We begin with a review of existing definitions of audit quality and describe general frameworks for establishing audit quality. Next, we summarize research on indicators of audit quality such as inputs, process, and outcomes. Finally, we offer some suggestions for future research. The study should be useful to academics interested in audit quality as well as to the Public Company Accounting Oversight Board (PCAOB) and other regulators.

scholarly journals PEOPLE AND AUDIT PROCESS ATTRIBUTES OF AUDIT QUALITY: EVIDENCE FROM MALAYSIA

2019 ◽  
Vol 18 (2) ◽  
pp. 47
Author(s):  
NOOR ADWA SULAIMAN ◽  
SUHAILY SHAHIMI ◽  
RANJIT KAUR NASHTAR SINGH
Keyword(s):  
Audit Quality ◽  
Internal Quality ◽  
Audit Process ◽  
Public Accounting ◽  
Accounting Firms ◽  
External Auditors ◽  
Public Accounting Firms ◽  
Group 2 ◽  
Audit Team ◽  
Group 1

This study seeks to add to understanding of the concept and attributes of audit quality from the perspective of those responsible for delivery audit services, the auditors, as a key constituent group in the auditing system. The study surveyed two groups of external auditors (group 1- audit partners and managerial level and, group 2 - senior auditors and junior auditors), as a basis to compare their perceptions on important of auditors and audit process attributes in achieving audit quality in practice. The study was conducted in the form of a survey, with data being gathered via questionnaire. Returned surveys from external auditors yielded a 37% response rate. Overall, top 5 highest rated attributes of audit quality reported to be most important in determining audit quality are: compliance with the International Standard Quality Control (ISCQ) 1, obtaining credible and sufficient audit evidence, technical expertise of audit team, audit work meeting the audit firms’ quality standards, and competency of the audit team. Further analysis shows that the two groups of respondents have differential views on attributes of audit quality in practice. Group 1 perceived attributes of audit quality are related to auditor’s assessment of risk and internal quality review procedures within the audit firm. In comparison, group 2 perceived auditors’ competency and compliance with relevant standards as indicators of audit quality. This study suggests differences in underlying view about attributes audit quality in practice by the two groups of auditors. Public accounting firms might be interested to understand such underlying differences so that efforts in improving audit quality in practice would be focusing on the key attributes that perceived to be important on delivery high-quality audit services. This study is significant by extending the literature on audit quality and also provides useful input to public accounting firms in improving audit quality in practice.

Engagement Quality Reviews: A Comparison of Audit Firm Practices

2007 ◽  
Vol 26 (2) ◽  
pp. 167-181 ◽  
Author(s):  
Kathryn K. Epps ◽  
William F. Messier
Keyword(s):  
Securities And Exchange Commission ◽  
Accounting Firms ◽  
The Public ◽  
Quality Review ◽  
Audit Review ◽  
Audit Planning ◽  
Sarbanes Oxley ◽  
Public Company ◽  
Quality Control Mechanism

Engagement quality (concurring partner) review is an important part of the audit review process. It is one quality control mechanism used by public accounting firms to monitor the quality of audit engagements. The engagement quality reviewer serves as an evaluator of the performance of the engagement partner and engagement team. Concerns about the effectiveness of existing firm concurring partner review practices have led to increased partner sanctions imposed by the Securities and Exchange Commission (SEC). In addition, Section 103 of the Sarbanes-Oxley Act of 2002 directs the Public Company Accounting Oversight Board (PCAOB) to develop an auditing standard on engagement quality review. This practice note reports on an analysis of six major firms' written guidance and practice aids for engagement quality review. Our comparison of the firms' guidance shows some differences in the assignment of engagement quality reviewer, the participation of the engagement quality reviewer in audit planning, the extensiveness of practice aids, and the involvement of engagement quality reviewer during the course of audit engagements. Lastly, we identify a number of research questions and practice implications.

scholarly journals Auditor-Provided Lobbying Service and Audit Quality

2016 ◽  
Vol 33 (3) ◽  
pp. 402-434 ◽  
Author(s):  
Brian Burnett ◽  
Hui Chen ◽  
Katherine Gunny
Keyword(s):  
Audit Quality ◽  
Auditor Independence ◽  
Litigation Risk ◽  
Accounting Firms ◽  
Earnings Response Coefficients ◽  
The Public ◽  
Political Interests ◽  
Going Concern Opinion ◽  
Earnings Response ◽  
Required Disclosures

Regulators and the public have expressed concerns about accounting firms lobbying politicians and regulators on behalf of their own audit clients because it could pose an advocacy threat to auditor independence. In this study, we examine whether these lobbying activities by accounting firms are associated with their clients’ audit quality. As required disclosures of lobbying activities under the Lobbying Disclosure Act are very limited, we construct a proxy to capture auditor lobbying on behalf of audit clients. Using our proxy for lobbying, we find that perceived audit quality (measured using earnings response coefficients) is negatively related to lobbying. However, we fail to find that actual audit quality is lower for these clients (measured as the propensity to restate earnings, propensity to issue a going-concern opinion, and discretionary accruals). Our findings suggest that investors perceive auditors’ lobbying for clients’ political interests as harmful to audit quality but that these concerns do not appear to materialize in the financial statements. Similar to the literature on other nonaudit services, our evidence suggests that reputation concerns and litigation risk provide enough incentive for auditors to maintain their independence in the presence of an advocacy threat to auditor independence.

Investigating Inspection Risk: An Analysis of PCAOB Inspections and Internal Quality Reviews

2016 ◽  
Vol 36 (1) ◽  
pp. 151-168 ◽  
Author(s):  
Chad M. Stefaniak ◽  
Richard W. Houston ◽  
Duane M. Brandon
Keyword(s):  
Risk Factors ◽  
Large Firm ◽  
Audit Fees ◽  
Internal Quality ◽  
Public Accounting ◽  
Audit Risk ◽  
Accounting Firms ◽  
Audit Firm ◽  
Public Company ◽  
High Level

SUMMARY We report the results of an experiment that examines how the salience of post-audit reviews (PARs; i.e., U.S. Public Company Accounting Oversight Board [PCAOB] inspections and public accounting firms' internal quality reviews [IQRs]) affects auditors' perceptions of inspection risk (i.e., the risk that an auditor or audit firm will suffer harm as a result of a PAR), as well as audit effort and fees. Using large-firm, high-level auditors as participants, we find that PAR salience (i.e., anticipation of a PAR) yields higher perceived overall engagement risk assessments, even after controlling for traditional audit risk factors, consistent with auditors viewing inspection risk as incremental to these risk factors. Further, we find that auditors respond to PAR salience by increasing both audit effort and fees—with higher perceived engagement risk and greater audit effort for PCAOB inspections than IQRs. Finally, we observe that increases in audit fees are fully explained by effort.

scholarly journals When the PCAOB Talks, Who Listens? Evidence from Stakeholder Reaction to GAAP-Deficient PCAOB Inspection Reports of Small Auditors

2012 ◽  
Vol 32 (2) ◽  
pp. 1-31 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Katherine A. Gunny ◽  
Tracey Chunqi Zhang
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Agency Conflicts ◽  
Accounting Firms ◽  
Publicly Traded Companies ◽  
Sarbanes Oxley ◽  
Quality Signals ◽  
Public Company ◽  
Inspection Process ◽  
Auditor Reporting

SUMMARY: Section 104 of the Sarbanes-Oxley Act (SOX) created the Public Company Accounting Oversight Board (PCAOB). The PCAOB conducts inspections of registered public accounting firms that provide audits for publicly traded companies. The results of the inspection process are summarized in publicly available reports at the PCAOB website. Using these reports, we categorize the inspection reports into three levels of increasing severity: clean, GAAS-deficient, and GAAP-deficient. We examine the potential use of GAAP-deficient PCAOB inspection reports as perceived audit quality signals for the clients of GAAP-deficient auditors that are inspected on a triennial basis by the PCAOB. Our investigation is predicated on the notion that audit quality is generally not directly observable. Thus, the clients of these auditors may seek to signal their desire for audit quality by dismissing their GAAP-deficient auditors. Our results suggest that the clients of GAAP-deficient, triennially inspected auditors are more likely to dismiss these auditors in favor of triennially inspected auditors that are not GAAP-deficient. In addition, we find that greater agency conflicts, the presence of an independent and expert audit committee, and outside blockholdings magnify this effect. Interestingly, we find no evidence that the clients use GAAP-deficient reports to procure a subsequent-year audit fee discount or more favorable going-concern auditor reporting treatment. Our evidence indicates that PCAOB inspection reports created heterogeneity in auditor brand name among a group of non-Big N/non-national auditors that did not previously exist and are universally treated by prior research as “other auditors.”

Does Recent Academic Research Support Changes to Audit Reporting Standards?

2016 ◽  
Vol 30 (2) ◽  
pp. 255-275 ◽  
Author(s):  
Jean Bédard ◽  
Paul Coram ◽  
Reza Espahbodi ◽  
Theodore J. Mock
Keyword(s):  
Financial Reporting ◽  
Academic Research ◽  
Financial Statements ◽  
Future Research ◽  
Research Support ◽  
The Public ◽  
Market Participants ◽  
Information Gap ◽  
Public Company ◽  
Reporting Process

SYNOPSIS The Public Company Accounting Oversight Board (PCAOB), the International Auditing and Assurance Standards Board (IAASB), and the U.K. Financial Reporting Council (FRC) have proposed or approved standards that significantly change the independent auditor's report. These initiatives require the auditor to make additional disclosures intended to close the information gap; that is, the gap between the information users desire and the information available through the audited financial statements, other corporate disclosures, and the auditor's report. They are also intended to improve the relevancy of the auditor's report. We augment prior academic research by providing standard setters with an updated synthesis of relevant research. More importantly, we provide an assessment of whether the changes are likely to close the information gap, which is important to financial market participants and other stakeholders in the audit reporting process. Also, we identify areas where there seems to be a lack of sufficient research. These results are of interest to all stakeholders in the audit reporting process, as the changes to the auditor's report are fundamental. Additionally, our summaries of research on the auditor's report highlight where there is limited research or inconsistent results, which will help academics identify important opportunities for future research.

An Empirical Investigation of IPO Underpricing and the Change to the LLP Organization of Audit Firms

2004 ◽  
Vol 23 (1) ◽  
pp. 53-67 ◽  
Author(s):  
Steven R. Muzatko ◽  
Karla M. Johnstone ◽  
Brian W. Mayhew ◽  
Larry E. Rittenberg
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Limited Liability ◽  
Litigation Risk ◽  
Ipo Underpricing ◽  
Audit Firm ◽  
Legal Structure ◽  
Audit Firms ◽  
Public Offering

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incentives for intrafirm monitoring by partners within an audit firm. Prior research suggests that underpricing protects underwriters from litigation damages, and that the level of underpricing varies inversely with both the amount of implicit insurance provided by the audit firm and the quality of the audit services provided. We hypothesize the change in audit firm legal structure reduced the assets available from audit firms in IPO-related litigation and indirectly reduced audit quality by lowering intrafirm monitoring. As a result, underwriters have incentives as a joint and several defendant with the audit firms to increase IPO underpricing, particularly for high-litigation-risk IPOs, following audit firms' shifts to LLP status. Our findings are consistent with this hypothesis.

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