Do Entry Barriers to the Public Company Audit Market Deter Low Quality Audit Firms?

2020 ◽  
Author(s):  
Andrew Kitto ◽  
Phillip T. Lamoreaux ◽  
Devin Williams
Keyword(s):  
Entry Barriers ◽  
Quality Audit ◽  
The Public ◽  
Audit Market ◽  
Audit Firms ◽  
Public Company

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.

scholarly journals The Effect of an Auditor Identity Disclosure Requirement on Audit Quality: An Experimental Examination Incorporating the Incremental Effect of a Signature Requirement

2019 ◽  
Vol 38 (4) ◽  
pp. 17-29 ◽  
Author(s):  
Allen D. Blay ◽  
Eric S. Gooden ◽  
Mark J. Mellon ◽  
Douglas E. Stevens
Keyword(s):  
Audit Quality ◽  
Social Norm ◽  
Data Availability ◽  
The Public ◽  
Audit Market ◽  
Incremental Effect ◽  
Public Company ◽  
Identity Disclosure ◽  
Disclosure Requirement ◽  
Higher Sensitivity

SUMMARY After considering a proposal to require the engagement partner's signature on the audit report (PCAOB 2009), the Public Company Accounting Oversight Board chose instead to only require the disclosure of the engagement partner's name (PCAOB 2015). We make predictions regarding the effects of the two proposed requirements using insights from social norm theory, and test those predictions using an experimental audit market setting found in the literature. We find that both requirements reduce misreporting when compared to a control setting with neither requirement present. We also document that the signature requirement generates an incremental reduction in misreporting when added to the disclosure requirement. Finally, we provide evidence that these effects are driven by participants with higher sensitivity to social norms. This theory and evidence supports the new identity disclosure requirement at the PCAOB and helps explain the existence of signature requirements in many non-U.S. countries. Data Availability: Experimental data are available from the authors upon request.

The Impact of PCAOB Reports Containing Audit Deficiencies on Non-U.S. Audit Firms: Initial Evidence

2014 ◽  
Vol 8 (1) ◽  
pp. A12-A25 ◽  
Author(s):  
HakJoon Song ◽  
Zhongxia (Shelly) Ye
Keyword(s):  
Professional Staff ◽  
Compliance Costs ◽  
The Public ◽  
Audit Firms ◽  
Public Company ◽  
Auditor Resignation ◽  
Inspection Process ◽  
One Year ◽  
The Impact

SUMMARY The Public Company Accounting Oversight Board (PCAOB) regularly conducts inspections of non-U.S. audit firms. Based on 243 PCAOB inspection reports of non-U.S. audit firms, published by the PCAOB between January 2006 and December 2011, we examine involuntary dismissals, voluntary resignations, and voluntary deregistration of inspected non-U.S. audit firms following PCAOB reports containing audit deficiencies. Our results show that 24 out of 1,604 clients of non-U.S. audit firms have dismissed their auditors within one year following the disclosure of audit deficiencies in PCAOB reports, and that only four of these 24 clients appointed successor auditors with clean PCAOB reports. Also, we find only four auditor resignation cases from the 1,604 clients of non-U.S. audit firms within one year after they received a PCAOB report containing audit deficiencies. Finally, 22 non-U.S. audit firms voluntarily ceased to be registered with the PCAOB either during the inspection process or after they received PCAOB reports containing audit deficiencies. Compared to registered non-U.S. audit firms, these deregistered non-U.S. audit firms have relatively fewer resources (e.g., fewer partners and professional staff, smaller offices) and, thus, may not be able to bear compliance costs (e.g., costs associated with preparation for inspections) associated with PCAOB inspections. This study provides insights regarding the impact of PCAOB international inspections.

scholarly journals Auditor gender, experience and reporting in nonprofit organizations

2017 ◽  
Vol 32 (6) ◽  
pp. 550-577 ◽  
Author(s):  
Anne-Mie Reheul ◽  
Tom Van Caneghem ◽  
Machteld Van den Bogaerd ◽  
Sandra Verbruggen
Keyword(s):  
Nonprofit Organizations ◽  
Audit Quality ◽  
Data Set ◽  
Content Type ◽  
Non Profit ◽  
The Public ◽  
Audit Market ◽  
Audit Firms ◽  
Audit Opinions ◽  
Auditor Characteristics

Purpose The purpose of this study is to investigate the association between individual auditor characteristics (gender, experience and sector expertise) and audit opinions in Belgian non-profit organizations (NPOs). The purpose is to identify auditor characteristics that imply a better assurance of financial statement (FS) quality. FS quality is essential to enhance financial accountability toward the resource providers of NPOs and the public at large. Design/methodology/approach Multinomial regressions are conducted on a data set of Belgian NPOs. Propensity score matching is used to control for potential self-selection bias. Findings Auditors with sector expertise are found to provide better assurance than their non-sector-expert counterparts. The former are more likely to disclose FS errors and uncertainties in their audit report. Originality/value This study contributes to the auditing literature by focusing on an understudied audit market, namely, the non-profit audit market. The number of non-profit studies that investigate determinant of audit quality is very scarce, and none of them explores the determinants of audit opinions. Moreover, these studies ignore individual auditor characteristics as determinants of audit quality. The findings of this study provide meaningful information for several actors in the NP field and for audit firms.

scholarly journals Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Release No. 2015-004, Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form

2015 ◽  
Vol 10 (1) ◽  
pp. C1-C10 ◽  
Author(s):  
Marcus M. Doxey ◽  
Marshall A. Geiger ◽  
Karl E. Hackenbrack ◽  
Sarah E. Stein
Keyword(s):  
Data Availability ◽  
The Public ◽  
Related Information ◽  
Audit Firms ◽  
Public Company ◽  
Auditing Standards ◽  
New Form

SUMMARY On June 30, 2015 the Public Company Accounting Oversight Board (PCAOB) issued a supplemental request for comment on its 2013 reproposal to require auditors to disclose in the auditor's report the name of the engagement partner and information about certain other participants in the audit. The supplemental request solicited public comments on an alternative to disclosure of this information in the auditor's report, namely that audit firms report (1) the name of the engagement partner, and (2) the names, locations, and extent of participation of other audit participants in a new form (Form AP) to be filed with the PCAOB within 30 days of the date the auditor's report is first included in a document filed with the SEC. The comment period ended on August 31, 2015. This commentary summarizes the participating committee members' views on the alternatives presented in the supplemental request for comment. Data Availability: The exposure drafts of the proposed and reproposed rules, the supplemental request for comment, and related information are available at: http://pcaobus.org/Rules/Rulemaking/Pages/Docket029.aspx

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.

Further Evidence on the Effect of Regulation on the Exit of Small Auditors from the Audit Market and Resulting Audit Quality

2017 ◽  
Vol 37 (4) ◽  
pp. 95-115
Author(s):  
Neil L. Fargher ◽  
Alicia Jiang ◽  
Yangxin Yu
Keyword(s):  
Audit Quality ◽  
Financial Statements ◽  
Discretionary Accruals ◽  
Data Availability ◽  
The Public ◽  
Audit Market ◽  
Audit Firms ◽  
Jel Classifications

SUMMARY Following the introduction of SOX in 2002 and the introduction of PCAOB inspections starting from 2003, DeFond and Lennox (2011) found that a large number of small auditors exited the SEC client audit market during the 2002–2004 period and that these exiting auditors were of lower quality relative to non-exiting auditors. This paper seeks to verify whether SOX and the introduction of PCAOB inspections improved audit quality through incentivizing small auditors providing lower audit quality to exit the market. Using client discretionary accruals and the likelihood of the clients restating financial statements as proxies for audit quality, we do not find that the small auditors that exited the market for SEC client audits were of lower quality than successor small audit firms that did not exit the market. JEL Classifications: G18; L51. Data Availability: Data are available from the public sources cited in the text.

Does Part II of the PCAOB inspection report provide new information to the market?

2018 ◽  
Vol 33 (8/9) ◽  
pp. 715-735 ◽  
Author(s):  
William Buslepp ◽  
R. Jared DeLisle ◽  
Lisa Victoravich
Keyword(s):  
Quality Control ◽  
Market Share ◽  
Audit Quality ◽  
Content Type ◽  
The Public ◽  
Audit Market ◽  
New Information ◽  
Public Company ◽  
Public Signal ◽  
New Evidence

Purpose Part II of the Public Company Accounting Oversight Board (PCAOB) inspection report is released only when firms fail to remediate quality control criticisms and is intended to be a public signal of audit quality. The purpose of this paper is to reexamine whether audit clients react to the release of Part II of the PCAOB inspection report as a signal of audit quality. Design/methodology/approach This study uses a difference-in-difference regression model to examine the association between the release of Part II of the PCAOB inspection report and an audit firm’s change in market share. A sensitivity analysis is also performed to determine whether the main findings are robust to the timing of the release of the report and type of quality control criticism included in Part II of the inspection report. Findings After controlling for the prior year’s changes in market share, the authors find no evidence that clients react to the public release of Part II of the report. In the second part of the study, they examine when clients become aware of the contents of the Part II report prior to its release. Firms with audit performance criticisms experience a decrease in market share following the release of Part I. Firms with firm management criticisms experience a significant decrease in market share following the remediation period and before the public release of Part II. Practical implications The results suggest that Part II of the PCAOB inspection report does not provide new information to the market. Clients appear to be aware of the information contained in Part II of the PCAOB inspection report prior to its release. The authors believe that the delay in releasing the Part II report may create an information imbalance, and the PCAOB may want to consider ways to improve the timeliness of the information. Originality/value This study questions the generalizability of prior research which finds that Part II of the inspection report provides new information that is valued by the public company audit market as a signal of audit quality. The findings provide new evidence that the contents of Part II and the firm’s ability to remediate the quality control concerns are known to audit clients prior to the public release.

scholarly journals The role of «BIG FOUR» auditing firms in the public procurement market in Ukraine

2020 ◽  
Vol 11 (9) ◽  
pp. 2483
Author(s):  
Olena Antoniuk ◽  
Natalya Kuzyk ◽  
Iryna Zhurakovska ◽  
Roman Sydorenko ◽  
Liudmyla Sakhno
Keyword(s):  
Public Procurement ◽  
Competitive Environment ◽  
Pricing Policy ◽  
The Public ◽  
Audit Market ◽  
Big 4 ◽  
Audit Firms ◽  
Procurement System ◽  
Big Four

The authors conducted a study aimed to identify the role of «Big Four» («Big 4») audit firms in the public procurement market in Ukraine.The purpose of the article is to answer the questions: whether Ukraine is in a general trend of most countries in the concentration of audit market; what is the share of revenues of the «Big Four» audit firms in the performance of audit services in the public procurement system in Ukraine. First of all, in order to get answers to these questions, the authors conducted a study of the main trends in the development of the «Big Four» companies in Ukraine. It was found that the characteristic competitive environment in the market of audit services, the impact on competitiveness of pricing policy and regulatory requirements, relating to the acquisition of audit services by public sector entities through a public procurement system "ProZorro". An element of price regulation and compliance with the transparent conditions of the competitive environment is the participation of audit firms in the public procurement system. As a result of processing data on procurement of audit services for the period 2008-2019, the authors calculated key indicators that characterize the concentration of the audit market. Based on the data on the amount of remuneration for various types of audit services using the public procurement system "ProZorro", aspects of pricing policy and the role of the companies of the "Big Four" in the market were established. The values indexes indicate that the companies of the «Big 4» do not have a complete monopoly in the segment of procurement of audit services, having certain dominant positions in some years, and the indexes indicate a trend towards effective competition in the audit services market in Ukraine.

What Are the Trends in PCAOB Inspections and the Reported Audit Deficiencies?

2020 ◽  
pp. 0148558X2093494
Author(s):  
Ashna L. Prasad ◽  
John C. Webster
Keyword(s):  
Financial Reporting ◽  
Fair Value ◽  
Audit Committees ◽  
Auditor Judgment ◽  
Generally Accepted Accounting Principles ◽  
The Public ◽  
Audit Firms ◽  
Public Company ◽  
The Mean ◽  
Fair Value Measurements

Although the Public Company Accounting Oversight Board (PCAOB) inspections commenced in 2003, few studies have analyzed the recurring nature of audit deficiencies both within and across U.S. and non-U.S. firms. This study investigates longitudinal trends in PCAOB Part I audit deficiencies and compares these deficiencies between initial and subsequent inspections. We classify the audit deficiencies contained in the inspection reports into three categories relating to Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), and Internal Controls over Financial Reporting (ICFR). Using 1,551 inspections conducted over the period 2003–2017, we find that 67% of Part I audit deficiencies in the related reports pertain to GAAP and that triennially inspected audit firms have the highest occurrence of these deficiencies. On average, 22% of audit deficiencies relate to GAAS, with the highest incidence of these deficiencies attributable to annually inspected audit firms. Although ICFR has the least audit deficiencies (11%), we find a significant increase from 2009. We find no significant differences in the mean number of GAAP, GAAS, and ICFR audit deficiencies between first- and second-round inspections. However, we find a significant increase in the mean number of ICFR audit deficiencies between the third- to fifth-round inspections. The audit areas of “revenue recognition,”“inventory,” and “fair value measurements” (i.e., those requiring significant auditor judgment) are the most frequent audit deficiencies identified by the PCAOB. This study provides insights into the frequency and nature of audit deficiencies to stakeholders such as investors, auditors, audit committees, and users of financial statements.

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