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.

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.

The Emergence of Artificial Intelligence: How Automation is Changing Auditing

2017 ◽  
Vol 14 (1) ◽  
pp. 115-122 ◽  
Author(s):  
Julia Kokina ◽  
Thomas H. Davenport
Keyword(s):  
Artificial Intelligence ◽  
Future Research ◽  
Audit Process ◽  
Accounting Firms ◽  
Big 4 ◽  
The Creation

ABSTRACT This paper provides an overview of the emergence of artificial intelligence in accounting and auditing. We discuss the current capabilities of cognitive technologies and the implications these technologies will have on human auditors and the audit process itself. We also provide industry examples of artificial intelligence implementation by Big 4 accounting firms. Finally, we address some potential biases associated with the creation and use of artificial intelligence and discuss implications for future research.

scholarly journals An Updated Analysis of Enforcement Actions against Engagement Quality Reviewers

2015 ◽  
Vol 9 (2) ◽  
pp. A1-A12 ◽  
Author(s):  
Michael Kraussman ◽  
William F. Messier
Keyword(s):  
Quality Control ◽  
Small Firms ◽  
Control Mechanism ◽  
Data Availability ◽  
Public Accounting ◽  
Accounting Firms ◽  
Quality Review ◽  
Big 4 ◽  
Quality Control Mechanism

SUMMARY Engagement quality review (EQR) is designed to be a quality control mechanism for improving the quality of audit engagements. This paper updates the findings of Messier, Kozloski, and Kochetova-Kozloski (2010) on enforcement actions against engagement quality (EQ) reviewers, especially in light of the December 2009 implementation of the new standard on engagement quality review, Auditing Standard No. 7 (AS7). We identified 16 enforcement actions since 2009 that involve some type of sanction against an EQ reviewer. Only two cases involved a Big 4 firm. Thus, the vast majority of cases involved EQRs from smaller public accounting firms. Six cases occurred prior to the implementation of AS7, nine cases occurred after AS7 took effect, and one case involved violations both prior to and after AS7 implementation. All of the pre-AS7 cases involved sanctions resulting from an inadequate EQR. In contrast, all of the post-AS7 cases involved sanctions resulting from a failure to perform an EQR. Our review of these post-AS7 cases suggests that some small firms were either unable or unwilling to bring in qualified outside reviewers. Our findings provide important implications for practitioners, regulators, and researchers interested in engagement quality review and in improving the overall quality of audit engagements. Data Availability: The cases included in this study are available from public sources.

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.

Behind the Numbers: Insights into Large Audit Firm Sampling Policies

2014 ◽  
Vol 29 (1) ◽  
pp. 61-81 ◽  
Author(s):  
Brant E. Christensen ◽  
Randal J. Elder ◽  
Steven M. Glover
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Data Availability ◽  
Future Research ◽  
Accounting Firms ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
National Office ◽  
Current Sampling ◽  
Audit Sampling

SYNOPSIS Changes in the audit industry after the Sarbanes-Oxley Act, including mandatory audits of internal control over financial reporting and PCAOB oversight and inspection of audit work, have potentially changed the nature and extent of audit sampling in the largest accounting firms. However, little academic evidence exists on these firms' current audit sampling policies (Elder, Akresh, Glover, Higgs, and Liljegren 2013). As such, we administer an extensive, open-ended survey to the national office of the Big 4 and two other international accounting firms regarding their firm's audit sampling policies. We find variation among the largest auditing firms' policies in their use of statistical and nonstatistical sampling methods and in inputs used in the sampling applications that could result in different sample sizes. Sampling experts' internal reviews indicate that projecting and resolving identified misstatements is one of the biggest difficulties that audit engagement teams face when using sampling techniques. Finally, we present evidence that some firms have significantly changed their approach to revenue testing due to PCAOB inspections. This evidence provides important insights into current sampling policies and presents opportunities for future research. Data Availability: Please contact the authors.

Big 4 Firms as Legal Service Providers: Implications for Audit Practice and Future Research Directions

2021 ◽  
Author(s):  
David N. Herda ◽  
Jonathan H. Grenier ◽  
Billy E. Brewster ◽  
Mary E Marshall
Keyword(s):  
Service Providers ◽  
Current Status ◽  
Future Research ◽  
Legal Services ◽  
Legal Service ◽  
Accounting Firms ◽  
Big 4 ◽  
Rule Changes ◽  
Future Research Directions ◽  
The U.S

The Big 4 accounting firms have expanded their legal service arms to historic proportions over the last decade, employing thousands of lawyers around the world. Although most of the Big 4's revenue from legal services is presently generated outside the U.S., they are now making inroads into the U.S. legal market, and rule changes are being considered that would further allow the Big 4 to offer legal services in the U.S. This essay summarizes the current status of Big 4 firms as legal service providers, discusses potential implications of legal offerings for their U.S. audit practices, and suggests directions for future research. Our proposed research questions are informed by several literatures, interviews with former Big 4 partners and practicing attorneys, and a survey of the general public. They center on the fundamental difference between audit and law practices, brand equity considerations, and culture changes within the Big 4.

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.

Auditor Independence: A Focus on the SEC Independence Rules

2008 ◽  
Vol 23 (2) ◽  
pp. 247-260 ◽  
Author(s):  
Audrey A. Gramling ◽  
Vassilios Karapanos
Keyword(s):  
Audit Committee ◽  
Financial Statements ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Background Information ◽  
Instructional Resources ◽  
Sarbanes Oxley ◽  
Policy Goals ◽  
Public Company ◽  
Securities Laws

Auditor independence is an important underpinning of the federal securities laws. These laws require that registrants' financial statements filed with the Securities and Exchange Commission (SEC) be audited by independent public accountants. The focus on independence for public company auditors was increased in light of the requirements of the Sarbanes-Oxley Act of 2002 to strengthen auditor independence. These instructional resources provide background information on the current SEC auditor independence rules. After becoming familiar with these rules, you will have the opportunity to complete several case scenarios that address: (1) hypothetical settings that may represent violations of the SEC independence rules, (2) possible actions that an audit committee might take when it determines that the SEC independence rules may have been violated, and (3) possible alternatives to the current SEC independence rules that could achieve the desired public policy goals of objective audits and investor confidence.

Increasing productivity in the Big 4: a research note

2014 ◽  
Vol 9 (3) ◽  
pp. 297-302
Author(s):  
Chereen Pasha
Keyword(s):  
Research Note ◽  
Future Research ◽  
Employee Productivity ◽  
Sources Of Information ◽  
Multiple Sources ◽  
Business Professionals ◽  
Accounting Firms ◽  
Content Type ◽  
Big 4 ◽  
Development Data

Purpose – The purpose of this article is to examine the idea of increasing employee productivity and retention within the Big 4 accounting firms through the inclusion of sleeping pods to allow napping. Design/methodology/approach – I have reviewed multiple sources of information and data including Organisation for Economic Co-operation and Development data to conclude that allowing napping within Big 4 accounting firms could increase productivity. Findings – As a research note suggesting future research, I am hoping that future research shall find support for the idea that there may be a relationship between being well rested and increase in performance. Practical implications – Higher quality of workers will increase their productivity and the company’s profits. Conservative leaders in large audit firms may reject the idea of incorporating “energy pods”. New ideas always come with push back and criticism. Originality/value – Big 4 firms have developed a working system that could be improved to remove the negative stigma of overworking their employees. The value this research strives to reveal is a structure that reduces turnover and increases retention after two years. “Energizing pods” have been introduced into technology and airline companies. Taking naps in a fast-paced, stressful work environment is not common, but it is a concept that should further explored for the sake of business professionals.

Market Reaction to Auditor Switching from Big 4 to Third-Tier Small Accounting Firms

2010 ◽  
Vol 29 (2) ◽  
pp. 83-114 ◽  
Author(s):  
Hsihui Chang ◽  
C. S. Agnes Cheng ◽  
Kenneth J. Reichelt
Keyword(s):  
Stock Market ◽  
Audit Quality ◽  
Market Reaction ◽  
Accounting Firms ◽  
Auditor Switching ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Period 2 ◽  
Prior Literature ◽  
Second Tier

SUMMARY: After the demise of Arthur Andersen, the public accounting industry has witnessed a significant migration of public clients to second-tier (Grant Thornton and BDO Seidman) and smaller third-tier accounting firms. While prior literature documents that smaller auditors are perceived by the stock market as an inferior substitute for a Big 4 auditor, this perception appears to have changed in recent years. In this paper, we analyze market responses to auditor switching from Big 4 to smaller accounting firms during 2002 to 2006. We break our sample period into two separate periods (Periods 1 and 2) based on when regulatory changes occurred. These changes included Sarbanes-Oxley (SOX) 404 implementation, Public Company Accounting Oversight Board (PCAOB) inspections, and a tightened Form 8-K filing deadline. We find a relatively more positive stock market reaction to clients switching from a Big 4 to a smaller third-tier auditor in Period 2. This relatively more positive reaction in Period 2 reflects companies seeking better services rather than a lower audit fee, when an audit quality drop is less likely. Overall, our results suggest that companies and investors have become more receptive to smaller accounting firms.

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