The economic impact of audit failures

This paper examines the economic consequences associated with an audit failure in the field of statutory auditing services, by analyzing changes in the audit firm’s market share around the time of the investigation process undertaken by the Spanish Public Oversight Board. We explore the variations in audit market share by applying the difference in differences method to a treatment group of 70 sanctioned audit firms and a matched control group of 70 non-sanctioned audit firms. The period of analysis covers the years from 1999 to 2015. Our results show that the sanctioned audit firms suffered a significant decrease in their relative number of clients. Moreover, this measure of market share decreased not only after the publication of the sanction disclosure (which may be attributed to reputational losses) but also after the initiation of the investigation (which may be attributed to the firm’s reluctance to audit risky clients). Findings are similar for both small and large firms when the market share is measured in terms of clients, whereas the evidence is weak concerning variations in their turnover-based market share. Our conclusions could be of interest for audit firms and also for audit regulators when designing disciplinary systems. Este trabajo examina las consecuencias económicas asociadas a un fallo de auditoría en el ámbito de los servicios de auditoría legal, analizando los cambios en la cuota de mercado de la firma de auditoría en torno al momento del proceso de investigación emprendido por el Consejo de Supervisión Pública español. Exploramos las variaciones en la cuota de mercado de la auditoría aplicando el método de diferencia en diferencias a un grupo de tratamiento de 70 firmas de auditoría sancionadas y a un grupo de control emparejado de 70 firmas de auditoría no sancionadas. El periodo de análisis abarca los años comprendidos entre 1999 y 2015. Nuestros resultados muestran que las firmas de auditoría sancionadas sufrieron un descenso significativo en su número relativo de clientes. Además, esta medida de la cuota de mercado disminuyó no sólo después de la publicación de la comunicación de la sanción (lo que puede atribuirse a las pérdidas de reputación), sino también después del inicio de la investigación (lo que puede atribuirse a la reticencia de la empresa a auditar clientes de riesgo). Los resultados son similares tanto para las pequeñas como para las grandes empresas cuando la cuota de mercado se mide en términos de clientes, mientras que la evidencia es débil en lo que respecta a las variaciones de su cuota de mercado basada en el volumen de negocio. Nuestras conclusiones podrían ser de interés para las firmas de auditoría y también para los reguladores de la auditoría a la hora de diseñar sistemas disciplinarios.

Introduction: Black Swans and Sinatra Inferences

Public mismanagement as a threat to life and limb is a rare and highly improbable phenomenon—the proverbial Black Swan. Bridges and buildings collapse, claiming the lives of people who had every reason to believe that governmental agencies protect their physical integrity through public oversight and maintenance. Properly analyzed, however, these unlikely events reveal causal mechanisms of a general nature, strong enough to trigger fateful mismanagement even under the restrictive conditions of professional bureaucracies and democratic government. Hence the “Sinatra Inference”: When a mechanism is powerful enough ‘to make it there’—i.e., where causal leverage is supposedly low—it is likely to ‘make it everywhere’ as soon as leverage is enlarged by weaker accountability structures, lower professional standards and lesser values than human safety.

Private Car, Public Oversight: Municipal Regulation of Ride-hailing Platforms in Toronto and the Greater Golden Horseshoe

Municipalities in many regions of Canada have regulated vehicle-for-hire services. With the rise of ride-hailing platforms, such as Uber and Lyft, this responsibility to produce a reliable vehicle-for-hire service has largely been transferred to private platforms. Using a case study of the City of Toronto and surrounding Greater Golden Horseshoe, this article examines how local regulation of this critical urban mobility service has changed. Drawing upon an analysis of 27 interviews with municipal staff, councilors and industry experts, a review of written local media, and a review of government documents, the study finds that municipalities are withdrawing from direct control of the industry due to a lack of tools of oversight and a prioritization of private industry over public service. The study discusses ongoing challenges that may be addressed by greater oversight of the service. It concludes by highlighting examples of municipalities growing their capacity for oversight and provides recommendations for further growth.

Party cronies take control of Hungary’s universities

Significance The Orban government, under the slogan of increased efficiency, has established 34 public-interest trust foundations and outsourced almost the whole of the higher education sector to these new entities. The boards of trustees of these foundations are staffed mostly by government loyalists, who will probably work to quell dissent and counteract liberal values. Impacts The foundations will be exempt from, or fall under only limited, public oversight and scrutiny, encouraging mismanagement. There is a risk of indirect enrichment, where contracts are awarded to associates or friends. Political loyalty will erode standards, although capable leadership and merit-based selection could improve some universities’ performance.

PUBLIC OVERSIGHT OF UKRAINE’S EUROPEAN INTEGRATION COURSE

The article deals with the wide range of mechanisms in support of civil society institutions–government interaction in the context of developing and implementing European integration reforms in Ukraine. The authors identified 6 strategic documents and 20 areas of reform related to the process of European integration, as well as the key issues concerning implementation of the Association Agreement between Ukraine and the EU. The authors conclude that positive trends are visible in recent decades in the institutional development of Ukrainian civil society, which has become a driving force of the country’s European integration aspirations. In this setting, civil society institutions (CSIs) work with government agencies, engage in informal advocacy, conduct monitoring policies, perform and publish policy analysis and recommendations, and work with and lobby international agencies and other actors.

SANITARY GUARDIANS IN PRE-REVOLUTIONARY RUSSIA

The article describes the history of creation and activities of sanitary guardians in the cities of the Russian Empire. The study aims to identify organizational and social contradictions in guardianships’ activities, which hindered citizens from involvement in solving local sanitary problems. Boards of sanitary guardians were established by order of local authorities to involve the population in the fight against epidemics and conducting sanitary measures. The sanitary guardians’ activities consisted of timely notification of local authorities about the emergence of epidemics, participation in sanitary inspections of households, and conducting preventive conversations with homeowners about their compliance with public health and urban improvement regulations. The practice of citizens social participation in monitoring the urban area’s cleanliness was intended to level out the contradictions between homeowners and temporary doctors and sanitary executive commissions “alien” to the city community. Still, it often provoked conflicts between sanitary guardians and homeowners who defended the rights to inviolability of their property. In general, public oversight conducted by sanitary guardians has proven ineffective in the long term.

THE NEED AND IMPORTANCE OF PUBLIC OVERSIGHT OF AUDITING ACTIVITIES

The article considers the essence of public supervision of audit activities as one of the methods for improving the quality of Audit Services, Trust in the auditor based on the synthesis of the main achievements of foreign and domestic economic science. The main functions performed by the public supervision body over audit activities are described. The effectiveness of the introduction of public supervision can be analyzed using indicators of external inspections that were conducted in connection with the receipt of numerous complaints, applications and appeals from individuals and legal entities, regarding the improper performance of professional duties by audit entities based on the results of their provision of audit services, the structure of the organization of the public supervision body for audit activities has been studied. A comparative analysis of the number of external inspections of the quality control system for audit services during 2015-2019 is made, and the structure and system of Organization of the public supervision body of foreign countries such as: Sweden, USA, Estonia, France, Bulgaria, Italy, Lithuania and others is analyzed. The features of the system of financing the public supervision system in Ukraine and in foreign countries are also considered. The main directions of improving the policy of introducing public supervision are proposed, which will contribute to improving the efficiency of the functioning of public supervision and harmonizing domestic legislation with European ones. The effectiveness of introducing training of higher education applicants in higher educational institutions in the direction of deepening knowledge related to the concepts of "quality control of audit activities" and "public supervision" is considered. It is proposed to reform the management of the Audit Chamber of Ukraine and select professional independent specialists who will properly perform their duties. It is proved that the need for public supervision is an important condition for improving the quality of audit activities and a necessary step towards joining the EU. The results of the research conducted to determine the need and role of public supervision of audit activities in Ukraine, as well as its harmonization and functioning based on the use of foreign experience are summed up.

A Synthesis of Information on Regulation, Organization and Methodology of Audit in the EU Countries

The paper sums up documents on the legal and practical framework for the regulation of audit, quality control of audit services and public oversight audit all countries of EU. For more than a quarter of a century, an understanding and approval practice of providing audit services has been formed in Ukraine. As an important element of the market mechanism, an audit involves expressing the reasoned opinion of an independent, qualified professional about the entity's financial statements. The time requirement is the use by regulators of new, modern audit techniques. Audit development in Ukraine always goes hand in hand with the study and use of positive audit experience in market economy countries. The main components of such techniques are certain procedures for auditing, quality control of audit services and public oversight bodies. The paper on legal acts and literary sources summarizes the legal and the best practices of audit regulation, quality control of audit services and public oversight bodies in all EU countries (currently 28). The tendencies of organization and regulation of audit activity, variants of influence on the quality of audit services, as well as application of state and non-governmental levers of forming the body of public supervision are indicated. A critical attitude to the regulation of audit, organization and methods of audit in Ukraine is justified. Conclusions are drawn and prospects for further research are outlined.