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.”

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.

The Effects of Prior Manager-Auditor Affiliation and PCAOB Inspection Reports on Audit Committee Members' Auditor Recommendations

2015 ◽  
Vol 28 (1) ◽  
pp. 1-14 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Veena L. Brown ◽  
Julia L. Higgs
Keyword(s):  
Audit Committee ◽  
Likert Scale ◽  
Auditor Independence ◽  
Publicly Traded ◽  
Publicly Traded Companies ◽  
Sarbanes Oxley ◽  
Selection Decisions ◽  
Public Company ◽  
Auditor Selection ◽  
One Year

ABSTRACT This study investigates (1) the extent to which audit committee members (ACM) of small publicly traded companies utilize Public Company Accounting Oversight Board (PCAOB) inspection reports in their auditor selection recommendations when management recommends hiring the auditor, and (2) whether the Sarbanes-Oxley Act's mandated one-year cooling-off period mitigates independence concerns of ACM resulting from a prior management-auditor affiliation in the same auditor selection context. We use financially literate professional participants as proxies for ACM who make a Likert-scale based recommendation for hiring the auditor. Our study manipulates a hypothetical, triennially inspected auditor's inspection results (favorable/unfavorable) as an auditor competence indicator and a prior management-auditor affiliation (present/absent) as an auditor independence indicator. We document that participants incorporate the inspection results into their selection recommendations, that prior affiliation negatively impacts ACMs' selection recommendations, and that auditor independence effects are contingent upon auditor competence. More specifically, auditor independence impacts auditor selection decisions only when auditor competence is favorable.

Auditing the Auditors: A Case on PCAOB Inspection Reports of Registered Public Accounting Firms

2009 ◽  
Vol 3 (1) ◽  
pp. B1-B18 ◽  
Author(s):  
Brian Daugherty ◽  
Marshall K. Pitman
Keyword(s):  
Public Accounting ◽  
Public Companies ◽  
Accounting Firms ◽  
Audit Firm ◽  
The Public ◽  
Sarbanes Oxley ◽  
Public Company ◽  
Public Accounting Firms ◽  
Audit Evidence ◽  
Inspection Process

SUMMARY: We present a timely practice-oriented case related to the inspection process of registered firms by the Public Company Accounting Oversight Board (PCAOB). This case allows auditing students an opportunity to explore the unique challenges that public accounting firms auditing U.S. public companies face with respect to the PCAOB inspection process. The case focuses on large and small registered firms (inspected annually and triennially, respectively) receiving an inspection report where the PCAOB identified certain matters considered to be audit deficiencies of such significance that the inspection team believed the audit firm did not obtain sufficient competent evidential matter to support the auditor’s opinion. The case exposes students to the PCAOB inspection process, highlights many deficiencies noted to date by the PCAOB inspectors, and emphasizes the importance of sufficient and appropriately documented audit evidence to support audit opinions. By reviewing ‘deficient’ inspection reports, students gain an appreciation for common audit deficiencies as well as the subjective nature of portions of the authoritative literature and the inspection process itself. The case reinforces students’ understanding of the practical matters involved in appropriately obtaining, evaluating, and documenting audit evidence, as well as educates students on the PCAOB inspection process in order to address important competencies required of Sarbanes-Oxley era audit professionals.

scholarly journals A Proposed Supplemental Teaching Model For Enhancing Students Understanding Of Sarbanes Oxley

2009 ◽  
Vol 2 (1) ◽  
pp. 59-62
Author(s):  
James Specht ◽  
Albert Kagan ◽  
Scott D. Maanum
Keyword(s):  
Accounting Students ◽  
Publicly Traded ◽  
Financial Reports ◽  
Accounting Firms ◽  
Publicly Traded Companies ◽  
Entry Level ◽  
Sarbanes Oxley ◽  
Public Company ◽  
Auditing Standards ◽  
Approach To Teaching

The Sarbanes Oxley Act of 2002 brought about major changes in how accounting firms conduct audits of publicly traded companies. Corporate officials have additional responsibilities in the areas of internal controls and financial reports. In addition there is a new organization responsible for established auditing standards for publicly traded companies, the Public Company Accounting Oversight Board. Accordingly, there are new requirements and responsibilities for auditors of publicly traded companies. In effect, the emergence of separate auditing standards for publicly traded companies and for companies that are not publicly traded is creating two distinct fields of auditing. These changes require a different approach to teaching auditing to accounting students. This article proposes one approach to teaching these significant changes for entry level auditors.

Audit Standard Setting and Inspection for U.S. Public Companies: A Critical Assessment and Recommendations for Fundamental Change

2009 ◽  
Vol 23 (2) ◽  
pp. 221-237 ◽  
Author(s):  
Steven M. Glover ◽  
Douglas F. Prawitt ◽  
Mark H. Taylor
Keyword(s):  
Standard Setting ◽  
The United States ◽  
Current Approach ◽  
Public Companies ◽  
Accounting Firms ◽  
Publicly Traded Companies ◽  
Sarbanes Oxley ◽  
Composition And Structure ◽  
Audit Standard ◽  
High Level

SYNOPSIS: The Sarbanes-Oxley Act of 2002 (SOX) established the Public Company Accounting Oversight Board (PCAOB) to oversee the accounting firms that audit publicly traded companies in the United States. In this commentary we outline why we believe the PCAOB’s audit standard-setting and inspection models are inefficient and dysfunctional. We assert that the Board’s ability to achieve its mission is limited by its early choices, together with its incentives, organizational composition, and structure. We support our assertions with a number of indicators of serious problems and flaws in the current approach. We also present high-level recommendations for change for policy makers, regulators, and leaders in the profession to consider in developing improved approaches to audit standard setting, inspection, and enforcement.

The Impact of the PCAOB Triennial Inspection Process on Inspection Year and Non-Inspection Year Audits

2021 ◽  
Author(s):  
Lawrence J. Abbott ◽  
William L Buslepp
Keyword(s):  
Audit Quality ◽  
The Public ◽  
Learned Behavior ◽  
Public Company ◽  
Inspection Process ◽  
One Year ◽  
The Impact

The Public Company Accounting Oversight Board (PCAOB) inspects auditors with fewer than 100 publicly held clients, once every three years (i.e., triennial inspection). In doing so, the PCAOB may inspect any audit engagement within the three-year window, including audits completed only months earlier ("inspection year" audits) and audits with at least a one-year, if not two-year lag ("non-inspection year" audits). We theorize the triennial inspection process affects audit quality levels, whereby auditors impose higher (lower) audit quality during inspection years (non-inspection years). We find clients of triennially inspected auditors have significantly lower levels of accruals during inspection years. Further, this change can be attributed to additional audit effort expended during inspection years. Finally, we find some evidence this is a learned behavior developed after the initial round of inspections. Our evidence suggests auditors opportunistically increase (decrease) audit quality during inspection (non-inspection) years in response to the triennial inspection process.

Do Social Ties between External Auditors and Audit Committee Members Affect Audit Quality?

2017 ◽  
Vol 92 (5) ◽  
pp. 61-87 ◽  
Author(s):  
Xianjie He ◽  
Jeffrey A. Pittman ◽  
Oliver M. Rui ◽  
Donghui Wu
Keyword(s):  
Financial Reporting ◽  
Information Transfer ◽  
Audit Committee ◽  
Audit Quality ◽  
Interpersonal Relations ◽  
Social Ties ◽  
Audit Fees ◽  
Firm Valuation ◽  
Agency Conflicts ◽  
External Auditors

ABSTRACT We examine whether social ties between engagement auditors and audit committee members shape audit outcomes. Although these social ties can facilitate information transfer and help auditors alleviate management pressure to waive correction of detected misstatements, close interpersonal relations can undermine auditors' monitoring of the financial reporting process. We measure social ties by alma mater connections, professor-student bonding, and employment affiliation, and audit quality by the propensity to render modified audit opinions, financial reporting irregularities, and firm valuation. Our evidence implies that social ties between engagement auditors and audit committee members impair audit quality. In additional results consistent with expectations, we generally find that this relation is concentrated where social ties are more salient, or firm governance is relatively poor and agency conflicts are more severe. Implying reciprocity stemming from social networks, we also report some suggestive evidence that audit fees are higher in the presence of social ties between an engagement auditor and the audit committee. Collectively, our analysis lends support to the narrative that the negative implications—namely, worse audit quality and higher audit fees—of these social ties may outweigh the benefits.

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.

U.S. Big 4 and Local Auditors in the China Initial Public Offering Market

2019 ◽  
Vol 22 (04) ◽  
pp. 1950024 ◽  
Author(s):  
Zhi-Yuan Feng ◽  
Hua-Wei Huang ◽  
Mai Dao
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Audit Fees ◽  
Agency Conflicts ◽  
Accounting Firms ◽  
Corporate Fraud ◽  
Big 4 ◽  
Investment Distortions ◽  
Ipo Pricing ◽  
Public Offering

This paper examines (1) whether auditor type affects initial public offering (IPO) pricing; (2) whether the effect of IPO pricing is different for clients with different ownership structures. We find that (1) firms being audited by Big 4 accounting firms receive IPO premium while others being audited by local accounting firms do not; (2) Big 4 auditors receive higher audit fees than China’s Top 10 or small local auditors. This paper extends the prior research (e.g., Kumar, P and N Langberg (2009). Corporate fraud and investment distortions in efficient capital markets. The RAND Journal of Economics, 40, 144–172) that reduces agency conflicts between shareholders and manager (by means of better audit quality) and also reconciles corporate misreporting and investment distortions.

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