A Reexamination of Audit Fees for Initial Audit Engagements in the Post-SOX Period

2013 ◽  
Vol 33 (2) ◽  
pp. 59-78 ◽  
Author(s):  
Rosemond Desir ◽  
Jeffrey R. Casterella ◽  
Julia Kokina
Keyword(s):  
Audit Fees ◽  
Auditor Independence ◽  
Data Availability ◽  
Sample Period ◽  
Accounting Firms ◽  
The Public ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Public Company ◽  
Client Relationships

SUMMARY: On August 16, 2011, the Public Company Accounting Oversight Board (PCAOB) issued a concept release seeking comments on ways to enhance auditor independence. The Board notes that higher failure rates in new audit engagements might be linked to unrealistic pricing. The Board's concern is that a new auditor might be more susceptible to management pressure if initial-year audit fees are set artificially low. Prior to the Sarbanes-Oxley Act (SOX) of 2002, empirical evidence shows that auditors discounted their initial-year audit fees. This practice, known as lowballing, was expected to decrease significantly after the enactment of SOX. Indeed, findings in Huang, Raghunandan, and Rama (2009) seem to confirm that Big 4 auditors charged a fee premium on new auditor-client relationships in 2006. However, it is not clear if more recent post-SOX initial-year audits are free of lowballing. We investigate whether lowballing exists in new auditor-client relationships in an “extended” post-SOX environment for the years 2007 to 2010. Our results suggest that both Big 4 and non-Big 4 accounting firms discounted their initial-year audit fees during our sample period (2007–2010). These findings should be of interest to the PCAOB as it searches for ways to bolster auditor independence. Data Availability: Available from public sources.

scholarly journals Auditor Fees and Going-Concern Reporting Decisions on Bankrupt Companies: Additional Evidence

2015 ◽  
Vol 9 (1) ◽  
pp. A13-A27 ◽  
Author(s):  
William J. Read
Keyword(s):  
Audit Fees ◽  
Auditor Independence ◽  
Data Availability ◽  
Audit Failure ◽  
The Public ◽  
Going Concern ◽  
Audit Firms ◽  
Public Company ◽  
Reporting Decisions ◽  
Auditor Fees

SUMMARY The recent growth in non-audit services (NAS) at the major audit firms has the attention of auditing regulators. On several occasions recently, board members of the Public Company Accounting Oversight Board (PCAOB) have indicated that the rise in NAS may place auditor independence at risk (Harris 2014; Tysiac 2014). Impaired independence can result in audit failure, which includes situations when auditors fail to issue going-concern (GC) audit opinions to soon-to-be bankrupt companies. In this paper, I examine the association between the propensity of auditors to issue GC opinions and NAS fees (and audit fees) to 203 bankrupt companies during 2002–2013. In analysis, I find no significant relation between GC decisions and NAS fees and audit fees. My results may interest U.S. regulators, who recently expressed concerns about the threat to auditor independence from the spike in NAS at the major firms. Data Availability: Publicly available from sources identified in the paper.

Hiring Auditors with a Part II Quality Control Report: An Opportunity for Increased Earnings Management or Lower Audit Fees?

2020 ◽  
Vol 5 (1) ◽  
pp. 73-93
Author(s):  
Jared Eutsler ◽  
D. Kip Holderness ◽  
Megan M. Jones
Keyword(s):  
Quality Control ◽  
Audit Quality ◽  
Audit Fees ◽  
Data Availability ◽  
Fiscal Year ◽  
The Public ◽  
Audit Firms ◽  
Public Company ◽  
General Demand ◽  
Systemic Quality

ABSTRACT The Public Company Accounting Oversight Board's (PCAOB) Part II inspection reports, which disclose systemic quality control issues that auditors fail to remediate, signal poor audit quality for triennially inspected audit firms. Auditors that receive a Part II inspection report typically experience a decrease in clients, which demonstrates a general demand for audit quality. However, some companies hire auditors that receive Part II inspection reports. We examine potential reasons for hiring these audit firms. We find that relative to companies that switch to auditors without Part II reports, companies that switch to auditors with Part II reports have higher discretionary accruals in the first fiscal year after the switch, which indicates lower audit quality and a heightened risk for future fraud. We find no difference in audit fees. Our results suggest that PCAOB Part II inspection reports may signal low-quality auditors to companies that desire low-quality audits. Data Availability: Data are available from the public sources cited in the text.

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.

An Analysis of SEC and PCAOB Enforcement Actions against Engagement Quality Reviewers

2010 ◽  
Vol 29 (2) ◽  
pp. 233-252 ◽  
Author(s):  
William F. Messier ◽  
Thomas M. Kozloski ◽  
Natalia Kochetova-Kozloski
Keyword(s):  
Securities And Exchange Commission ◽  
Future Research ◽  
Audit Process ◽  
Accounting Firms ◽  
Professional Skepticism ◽  
Quality Review ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Public Company ◽  
Quality Control Mechanism

SUMMARY: Engagement quality review is an integral part of the audit process. It is designed to be a quality control mechanism for assessing the quality of an audit engagement. Since the 1990s, the Securities and Exchange Commission (SEC) has increased sanctions against partners serving as engagement quality reviewers. Recently, the Public Company Accounting Oversight Board (PCAOB) issued an auditing standard on engagement quality review as required by Section 103 of the Sarbanes-Oxley Act of 2002. This practice note reports on an analysis of SEC and PCAOB enforcement actions against engagement quality reviewers (EQRs). Our results show the following: We identified 28 cases since 1993 that involve some type of sanction against an EQR. Only eight cases involved the Big 4/5 public accounting firms. All of the 28 cases involved sanctions due to violations of GAAS and 75 percent contained GAAP violations. Twenty-three cases identified GAAS violations related to a lack of due professional care. Further analysis of those cases showed that the EQR demonstrated a lack of professional skepticism in 22 cases, over-relied on management representations in 20 cases, and ignored materiality concerns in five cases. About half of the 28 cases resulted in the EQR being denied the privilege of practicing before the SEC or PCAOB for three or more years. Our findings provide important implications for practitioners and regulators, and areas for future research for those interested in engagement quality review.

scholarly journals Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB Rulemaking Docket Matter 029: PCAOB Release No. 2011-007, Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits

2012 ◽  
Vol 6 (1) ◽  
pp. C1-C6 ◽  
Author(s):  
Keith L. Jones ◽  
Jagadison K. Aier ◽  
Duane M. Brandon ◽  
Tina D. Carpenter ◽  
Paul Caster ◽  
...  
Keyword(s):  
Exposure Period ◽  
Data Availability ◽  
Audit Report ◽  
Public Accounting ◽  
Accounting Firms ◽  
The Public ◽  
Public Comment ◽  
Public Company ◽  
Public Accounting Firms ◽  
Auditing Standards

SUMMARY In October 2011, the Public Company Accounting Oversight Board (PCAOB or Board) issued a release to solicit public comment on amendments to its standards that would improve the transparency of pubic company audits. The objective of the release was to solicit public comments on a proposed standard that would (1) require registered public accounting firms to disclose the name of the engagement partner in the audit report, (2) amend the Board's Annual Report Form to require registered firms to disclose the name of the engagement partner for each audit report already required to be reported on the form, and (3) require disclosure in the audit report of other independent public accounting firms and other persons that took part in the audit. The PCAOB provided for a 91-day exposure period (from October 11, 2011, to January 9, 2012) for interested parties to examine the release and provide comments. The Auditing Standards Committee of the Auditing Section of the American Accounting Association provided the comments in the letter below to the PCAOB on PCAOB Rulemaking Docket Matter 029: PCAOB Release No. 2011-007, Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits. Data Availability: Information about and access to the release is available at: http://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB_Release_2011-007.pdf

Decision Making in a Public Accounting Firm: An Instructional Case in Risk Evaluation, Client Continuance, and Auditor Independence within the Context of the Sarbanes-Oxley Act of 2002

2006 ◽  
Vol 21 (4) ◽  
pp. 431-447 ◽  
Author(s):  
Ambrose Jones ◽  
Carolyn Strand Norman
Keyword(s):  
Decision Making ◽  
Risk Evaluation ◽  
Auditor Independence ◽  
Public Accounting ◽  
Audit Risk ◽  
Accounting Firms ◽  
The Public ◽  
Sarbanes Oxley ◽  
Public Accounting Firms ◽  
A Current

The purpose of this case, loosely based on an actual auditor-client situation, is to study decision making by auditors in public accounting firms regarding risk management (business, engagement, and audit risk), client continuance, and auditor independence. Audit partners often face difficult decisions for which they must balance the business objectives of the firm with their professional objective of satisfying the public interest. While most studies and cases focus on client-acceptance decisions (e.g., Johnstone 2000; Gendron 2002; Knapp and Knapp 2004), an equally important decision for public accounting firms in the Sarbanes-Oxley era is whether to keep a current client. This case encourages students to consider the decision with respect to client continuance, auditor independence, and risk evaluation.

scholarly journals Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Release No. 2016-003, Proposed Auditing Standard—The Auditor's Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards

2016 ◽  
Vol 11 (1) ◽  
pp. C26-C40 ◽  
Author(s):  
Marcus M. Doxey ◽  
Stephen H. Fuller ◽  
Marshall A. Geiger ◽  
Willie E. Gist ◽  
Karl E. Hackenbrack ◽  
...  
Keyword(s):  
Financial Statements ◽  
Auditor Independence ◽  
Data Availability ◽  
Financial Statement ◽  
Specific Information ◽  
Reporting Standard ◽  
The Public ◽  
Auditor Tenure ◽  
Public Company ◽  
Auditor Reporting

SUMMARY On May 11, 2016 the Public Company Accounting Oversight Board (PCAOB) issued a request for comment on Proposed Auditing Standard—The Auditor's Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards, a reproposal of its August 2013 proposed auditor reporting standard. The reproposal retains the pass/fail model of the existing auditor's report while seeking to enhance the form and content of the report. The reproposal solicited public comment on the following significant changes to the existing auditor's report: (1) add a description of “critical audit matters” that provides audit-specific information about especially challenging, subjective, or complex aspects of the audit as they relate to the relevant financial statement accounts and disclosures, (2) add a statement about auditor independence and the phrase “whether due to error or fraud” when describing the auditor's responsibilities to obtain reasonable assurance about whether the financial statements are free of material misstatements, (3) add a statement related to auditor tenure, and (4) standardize the form of the auditor's report, requiring the opinion be the first section of the auditor's report and requiring section titles to guide the reader. The comment period ended on August 15, 2016. This commentary summarizes the participating committee members' views on the alternatives presented in the request for comment. Data Availability: The concept release, proposed and reproposed rules, and supplemental information are available at: http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx

scholarly journals Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Release No. 2013-009, Proposed Rule on Improving the Transparency of Audit: Proposed Amendments to PCAOB Auditing Standards to Provide Disclosure in the Auditor's Report of Certain Participants in the Audit

2014 ◽  
Vol 8 (2) ◽  
pp. C1-C7 ◽  
Author(s):  
Urton L. Anderson ◽  
Lisa Milici Gaynor ◽  
Karl E. Hackenbrack ◽  
Ling Lei Lisic ◽  
Yi-Jing Wu
Keyword(s):  
Data Availability ◽  
Public Accounting ◽  
Accounting Firms ◽  
The Public ◽  
Related Information ◽  
Public Company ◽  
Public Accounting Firms ◽  
Auditing Standards

SUMMARY On December 4, 2013 the Public Company Accounting Oversight Board (PCAOB) solicited public comments on its reproposed amendments to its standards that would improve the transparency of public company audits. The amendments would require (1) disclosure in the auditor's report of the name of the engagement partner, and (2) disclosure in the auditor's report of the names, locations, and extent of participation of other independent public accounting firms that took part in the audit and the locations and extent of participation of other persons not employed by the auditor that took part in the audit. The comment period initially ended on February 3, 2014, but was subsequently extended to March 17, 2014. This commentary summarizes the contributors' views on these amendments. Data Availability: The exposure drafts of the proposed and reproposed rules and related information are available at: http://pcaobus.org/Rules/Rulemaking/Pages/Docket029.aspx

scholarly journals Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Rulemaking Docket Matter No. 37: PCAOB Release No. 2011-006, Concept Release on Auditor Independence and Audit Firm Rotation

2012 ◽  
Vol 6 (1) ◽  
pp. C15-C27 ◽  
Author(s):  
Keith L. Jones ◽  
Jagadison K. Aier ◽  
Duane M. Brandon ◽  
Tina D. Carpenter ◽  
Lisa M. Gaynor ◽  
...  
Keyword(s):  
Exposure Period ◽  
Auditor Independence ◽  
Data Availability ◽  
Professional Skepticism ◽  
Audit Firm ◽  
The Public ◽  
Public Comment ◽  
Public Company ◽  
Auditing Standards ◽  
Mandatory Audit Firm Rotation

SUMMARY In August 2011, the Public Company Accounting Oversight Board (PCAOB or Board) issued a concept release to solicit public comment on the potential direction of a proposed standard-setting project on means to enhance auditor independence, objectivity, and professional skepticism. The Concept Release sought comments on and explores in detail the possibility of mandatory audit firm rotation. The PCAOB provided for a 121-day exposure period (from August 16 to December 14, 2011) for interested parties to examine and provide comments on the concept release. The Auditing Standards Committee of the Auditing Section of the American Accounting Association provided the comments in the letter below (dated December 13, 2011) to the PCAOB on PCAOB Rulemaking Docket Matter No. 37: PCAOB Release No. 2011-006, Concept Release on Auditor Independence and Audit Firm Rotation. Data Availability: Information about and access to the release are available at: http://pcaobus.org/Rules/Rulemaking/Docket037/Release_2011-006.pdf

scholarly journals Increasing Transparency: A Prototype of the Nonpublic Portions of PCAOB Large-Firm Inspection Reports

2011 ◽  
Vol 5 (1) ◽  
pp. A1-A21 ◽  
Author(s):  
Rachael J. Evans ◽  
Ronald S. Boster ◽  
Bill Gradison
Keyword(s):  
Quality Control ◽  
Large Firm ◽  
Public Companies ◽  
Accounting Firms ◽  
The Public ◽  
Sarbanes Oxley ◽  
Public Company ◽  
Audit Reports

SUMMARY:The Sarbanes–Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB) and requires it to conduct annual inspections of accounting firms that regularly provide audit reports for more than 100 public companies (issuers). Certain information in these reports is, by law, nonpublic—in particular, findings of “quality control” (QC) deficiencies. Having access to nonpublic portions of PCAOB inspection reports, the authors create an illustrative example of a nonpublic portion of a large-firm inspection report, albeit with specific firms and issuers de-identified.

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