scholarly journals Is PCAOB Standard No. 5 Impairing Auditor Objectivity?

2015 ◽  
Vol 9 (2) ◽  
pp. C1-C7 ◽  
Author(s):  
Richard G. Brody ◽  
Christine M. Haynes ◽  
Craig G. White
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Internal Auditors ◽  
External Auditors ◽  
Sarbanes Oxley ◽  
Audit Efficiency ◽  
Client Relationships ◽  
External Auditor ◽  
The Impact ◽  
Audit Effectiveness

SUMMARY Auditing Standard No. 5 (AS5) urges external auditors to rely on the work of internal auditors when auditing internal controls over financial reporting. Although relying on the work of internal auditors may enhance audit efficiency, this paper examines whether such reliance is achieved at the expense of audit effectiveness. Specifically, this commentary questions whether conformity with AS5 is advisable given that changes in auditor/client relationships may have impacted internal and external auditor objectivity. Research has demonstrated that since the implementation of the Sarbanes-Oxley Act of 2002 external auditor objectivity has improved, ostensibly due to a reduced conflict of interest between external auditors and their clients. Although this result has positive implications for relying on the work of internal auditors, research also shows that internal auditors' objectivity has not improved over time. Thus, in complying with AS5, external auditors may be incorporating internal auditors' biases into their own judgments. The impact and implications of this problem are discussed.

scholarly journals An Examination Of Underreporting Of Time And Premature Signoffs By Internal Auditors

2010 ◽  
Vol 14 (4) ◽  
Author(s):  
Qianhua (Q) Ling ◽  
Michael D. Akers
Keyword(s):  
Internal Audit ◽  
Internal Controls ◽  
Professional Skepticism ◽  
Internal Auditors ◽  
External Auditors ◽  
Considerable Research ◽  
Internal Audit Function ◽  
Sarbanes Oxley ◽  
Audit Team ◽  
The Impact

The passage of the Sarbanes-Oxley Act of 2002 (SOX) heightened the importance of internal controls and accordingly, a key control - the internal audit function.  Consequently, management and external auditors have both increased their reliance on internal auditors’ work.  While there has been considerable research regarding the impact of the underreporting of time and premature sign-offs on the external audit, there has only been one study that has examined the impact of these two items on the internal auditors’ work.  Such research is dated (1994) and prior to the passage of SOX.  We surveyed members of the Institute of Internal Auditors (IIA) in the Midwest to examine their behavior and perceptions regarding these two items.  The respondents in our study believe the underreporting of time is unethical and is supported by their reporting of all time worked, even if such time exceeded the budget.  Our findings also show that the respondents feel premature sign-offs are unethical and result primarily from lack of professional skepticism and inadequate training.  Increasing training in audit areas and improving communications within the audit team are possible solutions to reduce premature sign-offs.  Premature sign-offs are more likely to occur in operational audits and to a lesser degree in financial audits and compliance audits. 

The Impact of Internal Audit Function Quality and Contribution on Audit Delay

2014 ◽  
Vol 34 (1) ◽  
pp. 25-58 ◽  
Author(s):  
Mina Pizzini ◽  
Shu Lin ◽  
Douglas E. Ziegenfuss
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
House Of Representatives ◽  
Internal Audit ◽  
Financial Statement ◽  
Internal Auditors ◽  
External Auditors ◽  
Sarbanes Oxley ◽  
The Impact ◽  
Relevant Work

SUMMARY The number of days required to complete financial statement audits (i.e., audit delay) increased significantly with the implementation of Section 404 of the Sarbanes-Oxley Act (SOX, U.S. House of Representatives 2002). As firms' in-house experts on internal control, Internal Audit Functions (IAFs) can substantially affect financial reporting processes and, thus, audit delay. Internal auditors can help management maintain strong internal controls and assist external auditors with financial statement audits. Accordingly, we investigate whether IAF quality and the IAF's contribution to financial statement audits affect audit delay in a sample of 292 firm-year observations drawn from the pre-SOX 404 period. Using survey data from the Institute of Internal Auditors (IIA), we develop a comprehensive proxy for IAF quality; we measure different aspects of IAF quality (e.g., competence, objectivity, fieldwork rigor); and we measure the nature of the IAF's contribution to financial statement audits (independently performed work and direct assistance). Results indicate audit delay is decreasing in IAF quality, and this decrease is driven by IAF competence and fieldwork quality. Delay is four days shorter when IAFs contribute to external audits by independently performing relevant work. High-quality IAFs contribute to financial statement audits by independently performing relevant work, while low-quality IAFs provide direct assistance.

The impact of audit reforms on objectivity during the performance of non-audit services

2014 ◽  
Vol 29 (3) ◽  
pp. 222-236 ◽  
Author(s):  
Richard G. Brody ◽  
Christine M. Haynes ◽  
Craig G. White
Keyword(s):  
Audit Quality ◽  
Content Type ◽  
Auditor Liability ◽  
Internal Auditors ◽  
External Auditors ◽  
Regulatory Perspective ◽  
External Auditor ◽  
The Impact ◽  
Practical Implications ◽  
Non Audit Services

Purpose – This research aims to explore whether recent audit reforms have improved auditor objectivity when performing non-audit services. Design/methodology/approach – In two separate experiments, the authors tested whether external and internal auditors' inventory obsolescence judgments are influenced by their client's (or company's) role as the buyer or seller in an acquisition setting. Findings – External auditors assessed the likelihood of inventory obsolescence objectively, regardless of their consulting role in the acquisition setting. Internal auditors assessed the likelihood of inventory obsolescence as higher when consulting for the buyer than when consulting for the seller, consistent with the supposition that the buyer would prefer to write-down inventory and negotiate a lower purchase price, whereas the seller would prefer the inventory not be written down. Practical implications – From a regulatory perspective, external auditors may be relying too much on the work of internal auditors if internal auditors' lack of objectivity as consultants extends to their assurance role. Originality/value – This paper extends prior research in the area of internal and external auditor objectivity and is the first paper to include both subject groups in the same experiment. It also addresses the current policy issues that may have a significant effect on audit quality and auditor liability.

The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

2011 ◽  
Vol 30 (2) ◽  
pp. 103-124 ◽  
Author(s):  
Jennifer Joe ◽  
Arnold Wright, and ◽  
Sally Wright
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Confidentiality Agreement ◽  
Financial Scandals ◽  
The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

The Effects of Employer and Client Identification on Internal and External Auditors' Evaluations of Internal Control Deficiencies

2012 ◽  
Vol 31 (1) ◽  
pp. 39-56 ◽  
Author(s):  
Chad M. Stefaniak ◽  
Richard W. Houston ◽  
Robert M. Cornell
Keyword(s):  
Internal Control ◽  
Audit Quality ◽  
Data Availability ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
Audit Efficiency ◽  
Public Company ◽  
External Auditor ◽  
Internal Control Deficiencies

SUMMARY The Public Company Accounting Oversight Board's (PCAOB) Auditing Standard No. 5 (AS5) encourages external auditors to rely on internal auditors to increase the efficiency of lower-risk internal control evaluations (PCAOB 2007). We use post-SOX experimental data to compare the levels and effects of employer (client) identification on the control evaluations of internal (external) auditors. First, we find that internal auditors perceive a greater level of identification with the evaluated firm than do external auditors. We also find some evidence that, ceteris paribus, internal auditors are less lenient than external auditors when evaluating internal control deficiencies (i.e., tend to support management's preferred position to a lesser extent). Further, while we support Bamber and Iyer's (2007) results by finding that higher levels of external auditor client identification are associated with more lenient control evaluations, we demonstrate an opposite effect for internal auditors—higher levels of internal auditor employer identification are associated with less lenient control evaluations. Our results are important because we are the first to capture the relative levels of identification between internal and external auditors, as well as the first to compare directly internal and external auditor leniency, both of which are important in light of AS5. That is, we provide initial evidence that external auditors' increased reliance on internal auditors' work, while increasing audit efficiency, also could improve audit quality by resulting in less lenient internal control evaluations, due, at least in part, to the effects of employer and client identification. Data Availability: Contact the first author.

The Joint Influence of the Extent and Nature of Audit Evidence, Materiality Thresholds, and Misstatement Type on Achieved Audit Risk

2012 ◽  
Vol 31 (2) ◽  
pp. 19-41 ◽  
Author(s):  
David V. Budescu ◽  
Mark E. Peecher ◽  
Ira Solomon
Keyword(s):  
Financial Reporting ◽  
Financial Statements ◽  
Internal Controls ◽  
Financial Statement ◽  
Audit Risk ◽  
Joint Influence ◽  
Materiality Thresholds ◽  
External Auditor ◽  
Audit Effectiveness

SUMMARY We use simulation to investigate the joint effects of materiality, evidence extent, evidence nature, and misstatement type on achieved audit risk, i.e., the risk of undetected material financial statement misstatement due to error or fraud. Our primary results are fourfold. First, contrary to conventional audit wisdom, we show that elevating the extent of testing decreases achieved audit risk only under certain conditions and may well increase it. Second, reducing materiality (attempting to perform a more precise audit) can either enhance or jeopardize audit effectiveness. Third, learning about the quality of the internal controls over financial reporting not only can help the auditor to perform an integrated audit, but also helps the auditor to reach better judgments about the extent to which and how evidence from the auditee organization's management and/or information systems may be distorted as a result of misstatement, reducing the risk that the auditor would be misled by such evidence. Fourth, when financial statements are biased intentionally due to fraud, it is especially important for the external auditor to supplement more traditional audit tests with tests that produce evidence that is less likely to be biased by management. Auditors who do not understand these four results run a heightened risk of compromising audit effectiveness.

The Impact of Enterprise Resource Planning (ERP) Systems on the Effectiveness of Internal Controls over Financial Reporting

2011 ◽  
Vol 25 (1) ◽  
pp. 129-157 ◽  
Author(s):  
John J. Morris
Keyword(s):  
Financial Reporting ◽  
Enterprise Resource Planning ◽  
Internal Control ◽  
Control Sample ◽  
Resource Planning ◽  
Internal Controls ◽  
Erp Systems ◽  
Individual Account ◽  
Sarbanes Oxley ◽  
The Impact

ABSTRACT: Software vendors that market enterprise resource planning (ERP) systems have taken advantage of the increased focus on internal controls that grew out of the Sarbanes-Oxley (SOX) legislation by emphasizing that a key feature of ERP systems is the use of “built-in” controls that mirror a firm’s infrastructure. They argue that these built-in controls and other features will help firms improve their internal control over financial reporting as required by SOX. This study tests that assertion by examining SOX Section 404 compliance data for a sample of firms that implemented ERP systems between 1994 and 2003. The results suggest that ERP-implementing firms are less likely to report internal control weaknesses (ICW) than a matched control sample of non-ERP-implementing firms. It also finds that this difference exists for both general (entity-wide), and individual (account-level) controls.

Former Audit Partners on the Audit Committee and Internal Control Deficiencies

2009 ◽  
Vol 84 (2) ◽  
pp. 559-587 ◽  
Author(s):  
Vic Naiker ◽  
Divesh S. Sharma
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
House Of Representatives ◽  
Audit Committee ◽  
Discretionary Accruals ◽  
Negative Association ◽  
Internal Controls ◽  
Sarbanes Oxley ◽  
External Auditor ◽  
Internal Control Deficiencies

ABSTRACT: This study examines the association between internal control deficiencies (ICDs) reported under Section 404 of the Sarbanes-Oxley Act (SOX, U.S. House of Representatives 2002) and the presence of former audit partners on the audit committee who are affiliated (AFAPs) and unaffiliated (UFAPs) with the firm's external auditor. We find a negative association between AFAPs and UFAPs on the audit committee and ICDs. We also find results that suggest the NYSE and NASDAQ three-year “cooling-off” rule applying to AFAPs may be unwarranted and deserves further empirical and regulatory attention. Further tests suggest AFAPs do not allow management to circumvent the disclosure of ICDs when conditions appear to suggest this may be so, and that AFAPs are negatively related to performance-adjusted discretionary accruals. Collectively, we interpret these findings to suggest that AFAPs and UFAPs on the audit committee are associated with more effective monitoring of internal controls and financial reporting.

scholarly journals Re-evaluating the effectiveness of auditing standard no. 2: longitudinal analysis of restatements and the outcome of auditor litigation in lawsuits filed from 1996 to 2009

2014 ◽  
Vol 11 (2) ◽  
pp. 300-315
Author(s):  
Sebahattin Demirkan ◽  
Ross D. Fuerman
Keyword(s):  
Financial Reporting ◽  
Legal System ◽  
Reporting Quality ◽  
Accurate Identification ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Financial Restatements ◽  
Section 302 ◽  
The Impact ◽  
Audit Effectiveness

We provide evidence of the impact of Auditing Standard No. 2 (“AS 2”), issued pursuant to the Sarbanes-Oxley Act of 2002 (“SarBox”), on the outcome of auditors in financial reporting litigation. Specifically, we focus on the existence of financial restatements and how and why they affected the outcome of the auditor in the financial reporting lawsuits. Our longitudinal method subjected to year-by-year regression analysis 2,059 financial reporting lawsuits filed from 1996 to 2009. Our results indicate that restatements are positively associated with more severe outcomes for the auditor in lawsuits filed in 2002 and in the years after 2004. However, restatements are not significant in lawsuits filed in 2003 and 2004. Pressure from SarBox Section 906 criminal penalties and Section 302 requirements to disclose material weaknesses, coupled with a lack of guidance to distinguish material weaknesses from significant deficiencies, temporarily and indirectly caused the issuance of a large number of restatements that were not material or comprehensible to participants in the legal system. Thus, they were temporarily unable to use the restatements to inform their litigation behavior. However, after the June 17, 2004, release of AS 2, participants in the legal system were again able to use the restatements to inform their behavior. This suggests that AS 2, notwithstanding its inefficiency, necessitating its subsequent superseding by Auditing Standard No. 5 (“AS 5”), increased audit effectiveness and financial reporting quality by facilitating more accurate identification of material weaknesses

Enriching AIS Courses With SOX Compliance Activities

2010 ◽  
Vol 5 (1) ◽  
pp. 1-24 ◽  
Author(s):  
Joann Segovia ◽  
Carol M. Jessup ◽  
Marsha Weber ◽  
Sheri Erickson
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Controls ◽  
Accounting Profession ◽  
Investor Confidence ◽  
Reporting Requirements ◽  
Sarbanes Oxley ◽  
Audit Firms ◽  
Significant Change

A very significant change to the accounting profession occurred in 2002 when the Sarbanes-Oxley Act of 2002 (SOX) was enacted. This legislation had a significant impact on corporations and their audit firms. The objective was to improve corporate governance and its quality of financial reporting to improve investor confidence. This paper provides instructors with a background on SOX and suggests readings and activities that reflect the requirements of SOX as it relates to the AIS environment and the analysis of internal controls. These activities can strengthen students' understandings of how corporations respond to the various reporting requirements of this Act.

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