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  • Jennifer M Mueller-Phillips
    Accelerated filing deadlines, internal controls, and...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.07 Impact of SEC Actions, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements 
    Title:
    Accelerated filing deadlines, internal controls, and financial statement quality: The case of originating misstatements.
    Practical Implications:

    Given the significant amount of concern regarding the reliability of financial statement reporting under new filing deadlines (movement from 90 days to 75 days in 2003 and then to 60 days in 2006), the authors provide evidence which shows the concern was valid but only temporarily. The authors use originated misstatements to indicate the beginning of a misstatement, showing that accelerated filers experienced higher likelihood of misstatements after the first acceleration, however large accelerated filers did not experience such a change in response to the second acceleration. Additionally, implementation of SOX appears to have increased reliability with fewer originated misstatements upon implementation.

    Citation:

    Boland, C. M., S. N. Bronson, C. E. Hogan. 2015. Accelerated filing deadlines, internal controls, and financial statement quality: The case of originating misstatements. Accounting Horizons 29 (3) 297-331.

    Keywords:
    Accelerated filing, financial statement restatements, Sarbanes-Oxley Act, filing lags, internal controls
    Purpose of the Study:

    The authors investigate whether Government regulationspecifically through changes in filing deadlines and implementation of the Sarbanes Oxley Act (SOX)influence the origination of financial statement misstatements. They specifically focus on the origination of misstatements to determine if firms sacrificed relevance and reliability to comply with accelerated filing dates.

    Design/Method/ Approach:

    The analyses use a sample of 17,216 firm-year observations from 12/15/2002 to 12/14/2007. The authors run a regression analysis predicting the likelihood of a restatement for accelerated filers and large accelerated filers relative to non-accelerated filers. The model incorporates controls for other known determinants of changes in likelihood of restatement.

    Findings:

    The authors find:

    • Accelerated filers had a higher likelihood of a misstatement following the filing deadline shift from 90 to 75 days.
    • Accelerated filers had a reduced likelihood of a misstatement following implementation of SOX.
    • Large accelerated filers did not experience a change in likelihood of a misstatement following the filing deadline shift from 75 to 60 days.

    The results suggest that the concerns of filers and their auditors regarding the potential for lower-quality information resulting from accelerated filing was valid, although only temporarily. In the long run, companies were able to file reports in a timelier manner without a corresponding increase in the likelihood of misstatement.

    Category:
    Accountants' Reporting, Standard Setting
    Sub-category:
    Impact of SEC Actions, Restatements
  • Jennifer M Mueller-Phillips
    SEC Division of Corporation Finance Monitoring and CEO...
    research summary posted September 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.07 Impact of SEC Actions, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements, 12.04 Investigations 
    Title:
    SEC Division of Corporation Finance Monitoring and CEO Power.
    Practical Implications:

    This research is important for several reasons. First, the authors provide insight into how a monitoring mechanism, such as the staff of the DCF, adds to the oversight of the financial reporting process. The findings illuminate the importance of understanding the conflict between boards and CEOs by suggesting that a strong CEO's influence over a board may adversely affect the effectiveness of board oversight. The authors provide evidence that the DCF may target companies with strong CEOs and weak board monitoring for more intensive review. Second, the results imply that the discovery of the need to restate is different for DCF-instigated restatements. DCF-prompted restatements lead companies to re-evaluate their governance structure.

    Citation:

    Cheng, X., L. Gao, J. E. Lawrence, and D. B. Smith. 2014. SEC Division of Corporation Finance Monitoring and CEO Power. Auditing: A Journal of Practice & Theory 33 (1): 29-56.

    Keywords:
    CEO, DCF, governance, monitoring, investigations, restatements
    Purpose of the Study:

    Section 408 requires the Securities and Exchange Commission (SEC) to review the filings of all SEC registrants every three years. The SEC Division of Corporation Finance (and not the Division of Enforcement) is the part of the SEC charged with carrying most of the burden of the Section 408 monitoring. This study investigates this SEC monitoring role and differs from past SEC research by focusing on the SEC Division of Corporation Finance (DCF) rather than the Division of Enforcement and specifically on DCF's "review and comment" monitoring role.

    The authors argue that the DCF appears to realize powerful CEOs have more opportunity to deceive due to their greater board control and, therefore, they are viewed as experiencing less monitoring by other sources. In other words, the DCF appears to be naturally drawn to the firms where strong CEOs dominate the financial reporting process and firm-level monitoring by auditors and boards may be relatively lax.

    Design/Method/ Approach:

    The sample of 980 observations includes restatements from 2000 through 2007 obtained from GAO reports and Audit Analytics. The authors restrict the companies to those found in a Russell index. 209 observations were DCF prompted and 771 observations were other monitor prompted. Of the 980 observations, 825 were used in the analysis of the changes in CEO power as a response to restatement.

    Findings:
    • The authors find evidence that a powerful CEO may be able to bargain for less board scrutiny through fewer board meetings.
    • In the year prior to the discovery of the need to restate, firms with restatements prompted by the DCF have stronger CEO power and exhibit some evidence of weaker board monitoring.
    • Compared to firms with restatements prompted by other monitors, firms with restatements prompted by the DCF tend to have strong CEOs in the period prior to the discovery of restatements.
    • The authors find that companies with restatements prompted by DCF (versus other monitors) are more likely to terminate strong CEOs following the discovery of restatements.
    Category:
    Accountants' Reporting, Standard Setting
    Sub-category:
    Impact of SEC Actions, Investigations, Restatements
  • Jennifer M Mueller-Phillips
    Balancing the Costs and Benefits of Auditing and Financial...
    research summary posted April 1, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 01.07 Impact of SEC Actions, 15.0 International Matters 
    Title:
    Balancing the Costs and Benefits of Auditing and Financial Reporting Regulation Post-SOX, Part II: Perspectives from the Nexus at the SEC
    Practical Implications:

    The study provides helpful insight on auditing and financial reporting public policy issues and initiatives. The report focuses on the roles of the SEC and PCAOB in the setting of standards, convergence of standards, and the formation of a new public oversight regulating body. The author provides her personal perspective on the complications and thought processes behind many of the tasks taken on by the SEC from 2006 - 2008.

    For more information on this study, please contact Zoe-Vonna Palmrose (zv.palmrose@marshall.usc.edu).

    Citation:

    Palmrose, Z.-V. 2010. 2010. Balancing the Costs and Benefits of Auditing and Financial Reporting Regulation Post-SOX, Part II: Perspectives from the Nexus at the SEC. Accounting Horizons 24 (3):487-507.

    Purpose of the Study:

    Zoe-Vonna Palmrose served as the Deputy Chief Accountant for Professional Practice in the Office of the Chief Accountant. From August 2006 to July 2008, Palmrose observed the effects of SEC activities in the areas of auditing and financial reporting public policy during her tenure. Palmrose discusses her observations about the following areas:

    • Oversight of the PCAOB by the SEC
    • SEC Federal Advisory Committee on Improvements to Financial Reporting (CIFiR)
    • International Financial Reporting Standards (IFRS)
    • U.S. Department of the Treasury Advisory Committee on the Auditing Profession
    • Auditor Independence
    • Assessing Audit Regulation Under Sarbanes-Oxley 
    Design/Method/ Approach:

    The author relies on personal experiences from her tenure as Deputy Chief Accountant to provide insight about the topics mentioned above.

    Findings:
    • The Committee on Improvements to Financial Reporting took on an initiative to increase the usefulness of SEC reports. The improvements focused on enhancing the standards-setting process as well as the helpfulness of the standards. The committee also focused on clarifying guidance for restatements and accounting judgments. The author finds that no formal action has been taken on the committee’s recommendations.
    • During the author’s tenure, the leadership of the SEC moved from an advocating role towards IFRS and U.S. GAAP convergence to allowing U.S. companies adopt IFRS. The author noted that the possible costs associated with U.S. companies adopting IFRS standards would be high relative to the costs associated with adopting Sarbanes-Oxley.
    • The U.S. Department of the Treasury Advisory Committee on the Auditing Profession issued a report in 2008 with recommendations for audit firm governance and transparency. The report urged firms to appoint independent members with full voting power to audit firm boards and advisory boards. It also urged the PCAOB to require certain public annual reporting by large audit firms by 2010. The report recommended that the PCAOB develop key indicators of audit quality and effectiveness and require the disclosure of those indicators by audit firms. The report recommended that large audit firms file audited U.S. GAAP financial statements with the PCAOB beginning in 2011. The report also recommended that the PCAOB should monitor catastrophic risk associated with audit quality.
    • The author observes that the co-chairs of the Advisory Committee were concerned primarily with the revenues of audit firms based on type of service. The concern was focused on non-audit services revenue. The author finds that the views of the co-chairs will likely become a part of public policy discussions.
    • The author observes that the convergence of auditor independence standards is becoming very difficult. The author suggests that a compilation comparing independence rules of the SEC and PCAOB would be helpful to initiate the change and convergence of the rules. The author finds that one factor preventing convergence is that international standards use a threats and safeguards approach which is adamantly opposed by investor advocates in the U.S.
    • The author observes that the PCAOB standard setting process does not allow enough meaningful public input. The author finds that the PCAOB has failed to distinguish public company audits enough to warrant the need for auditing standards other than the IASB standards. The author notes that SEC oversight does not mean that is runs the PCAOB. The two bodies have different agendas which can create issues.
    • The author proposes that a new regulatory organization for audits of public entities be formed. The regulatory organization would be subject to SEC oversight. The regulatory organization would be funded by an audit fee surcharge.
    Category:
    International Matters, Standard Setting
    Sub-category:
    Impact of PCAOB, Impact of SEC Actions
  • Jennifer M Mueller-Phillips
    PCAOB Audit Regulation a Decade after SOX: Where It Stands...
    research summary posted April 1, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 01.07 Impact of SEC Actions 
    Title:
    PCAOB Audit Regulation a Decade after SOX: Where It Stands and What the Future Holds
    Practical Implications:

    The commentary provides an overview of activities that have occurred since the creation of the PCAOB. The article examines the PCAOB and guidance that has enhanced its ability to fulfill its duties over the past decade. The commentary provides information relevant to evaluating the effect that SOX, the Dodd-Frank Act, and the JOBS Act have had on the PCAOB in its relation to audit regulation. The commentary also provides information relevant to the future of the PCAOB and audit regulation.

    For more information on this study, please contact Zoe-Vonna Palmrose (zv.palmrose@marshall.usc.edu).

    Citation:

    Palmrose, Z.-V. 2013. PCAOB Audit Regulation a Decade after SOX: Where It Stands and What the Future Holds. Accounting Horizons 27 (4):775-798.

    Keywords:
    PCAOB, audit regulation, audit quality, SOX, cost benefit analysis
    Purpose of the Study:

    This study provides a commentary that assesses the status of the PCAOB in relation to audit regulation. The commentary discusses core auditing principals and how they will shape the standards that appear in the future. The author discusses activities performed in the ten years since Sarbanes-Oxley was implemented. The following guidance is considered as it relates to the PCAOB’s inspection process, standard-setting process, and enforcement activities:

    • The Sarbanes-Oxley Act of 2002
    • The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
    • The 2012 Jumpstart Our Business Startups Act
    Design/Method/ Approach:

    The author uses personal experiences and observations from the field to provide evidence for the commentary. The commentary is based on ten years of information gathered from 2002, beginning with the implementation of Sarbanes-Oxley.

    Findings:
    • The author finds that much of the PCAOB’s first decade was spent implementing Sarbanes-Oxley. One crucial decision for the PCAOB was the 2010 Supreme Court decision, Free Enterprise Fund et al v. PCAOB (2010). SEC oversight allowed the PCAOB to stay intact. Until the decision, the Board found it hard to retain members in order to complete its duties.
    • The author observes that members that have been appointed to the board are influencing the Board’s decisions, but lack auditing experience.
    • The author finds that the non-voluntary nature of PCAOB funding is an added strength of the Board. The abundance of funds that the board secures allows it to perform and regulate many activities across a broad spectrum; however, the nature of its activities generates scrutiny of its spending.
    • The author finds that allowing the PCAOB to write its own auditing standards (rather than actively converging with or adopting international standards) adds value to the standard setting process. The author finds that the word “judgment” is being used less frequently in the new PCAOB auditing standards, and speculates about how the impact this choice has on audit quality.
    • The author finds that the PCAOB still experiences difficulties with its inspection of foreign audit firms. The Dodd-Frank Act helped by allowing the PCAOB to share some information with foreign regulating bodies. The PCAOB is still denied access to conduct inspections in certain countries.
    • The author finds that the PCAOB shifted its focus of the audits of internal controls from efficiency to effectiveness of the audits.
    • The author finds that the JOBS Act lessened the reporting requirements for smaller companies in response to financial reporting cost-benefit concerns.
    • The author finds that the implementation of cost-benefit analysis will be challenging for the PCAOB. The PCAOB will look to hire more economists to evaluate cost-benefit considerations related to its standards.
    • The author observes that the distance the PCAOB has placed between itself and those that it regulates has had a pervasive effect on regulation of public company auditing.
    Category:
    Standard Setting
    Sub-category:
    Impact of PCAOB, Impact of SEC Actions
  • The Auditing Section
    An Investigation of Auditor Perceptions about Subsequent...
    research summary posted April 13, 2012 by The Auditing Section, tagged 01.0 Standard Setting, 01.07 Impact of SEC Actions, 09.0 Auditor Judgment, 09.03 Adequacy of Evidence 
    Title:
    An Investigation of Auditor Perceptions about Subsequent Events and Factors That Influence This Audit Task
    Practical Implications:

    Auditors should recognize that an implicit tradeoff exists between the availability of subsequent event evidence and timelier reporting.  However, the net effect is not well understood because prior research has only focused on quantifying the benefits of timely reporting, not the costs associated with obtaining less subsequent event evidence.  The low evidence discovery rate reported by participants suggests that the current audit methodology might suffer from inefficiencies.  Further research should establish relative frequency information to help auditors generate hypotheses and guide audit planning.

     

    Citation:

    Janvrin, D. J. and C. G. Jeffrey. 2007. An Investigation of Auditor Perceptions about Subsequent Events and Factors That Influence This Audit Task.  Accounting Horizons 21 (3):  295-312

    Keywords:
    subsequent event; evidence evaluation; auditor judgment; timely reporting; accountants’ reporting.
    Purpose of the Study:

    Generally accepted auditing standards require auditors to consider subsequent events by examining transactions that occur after the balance sheet date.  In light of the Securities and Exchange Commission’s (SEC) decision to shorten the time between the balance sheet and report dates, this study seeks to better understand how auditors search for and discover subsequent event evidence in this new reporting environment.  Prior literature on this subject is sparse.  The Canadian Institute of Chartered Accountants (CICA) and the American Institute of Certified Public Accountants (AICPA) are concerned that audit quality will suffer because auditors now have less time to discover evidence of subsequent events.  For example, earnings management behavior is difficult to detect without persuasive evidence.  Specific study goals are as follows:

    •   Verify that auditors perceive subsequent event evidence to be important.
    •  Understand the process auditors employ to search for subsequent event evidence.  Standards suggest ten search procedures (e.g., reading interim financial statements prepared since the balance sheet date), but the degree to which auditors actually follow this guidance is not evident.
    •  Determine whether auditors uncover subsequent event evidence.  Measuring the perceived effectiveness of the ten recommended search procedures provides valuable feedback to the profession.
    •  Examine factors influencing this process.  Theory suggests the intensity of auditors’ search activities is influenced by balance sheet date judgment characteristics (i.e., transaction type, amount of supporting evidence, and consistency with prior expectations), characteristics of anticipated challenge evidence (i.e., consistency with prior expectations, and materiality) and environmental characteristics (i.e., length of search period, and time pressure).
    Design/Method/ Approach:

    A field-based experiential questionnaire was issued to U.S. auditors from each of the Big-4 firms and one national firm over a one-year period prior to November 2004. Participants had an average of 9.6 years of experience. Participants were asked to rate how often they search for and discover subsequent event evidence both in general, and using the ten procedures found in auditing standards.

    Findings:
    •  The authors find that auditors generally perceive subsequent event evidence as more important than the need for timely reporting, and that they use subsequent event evidence in the audit.
    •  The authors find that most auditors perform the majority of fieldwork after the balance sheet date, leaving potentially less time to gather subsequent event evidence.
    •  The authors find that auditors generally follow the ten suggested procedures.  However, the event discovery rate using any one procedure appears to be low.
    •  The authors find that auditors are more likely to search for and find subsequent event evidence when (1) minimal historical evidence exists, and (2) their balance sheet date judgments do not meet prior expectations.
    •  The authors find that auditors are more likely to search for evidence (1) when evaluating non-routine account balances, (2) that potentially impacts the financial statements as a whole rather than one account, and (3) when they have ample time to search.
    •  The authors find that auditors are more likely to find subsequent event evidence (1) that is consistent, rather than inconsistent, with their balance sheet date judgment, and (2) when the search period is longer.
    •  The authors find that time pressure does not impact whether auditors perceive that they find significant subsequent event evidence.
    Category:
    Standard Setting, Auditor Judgment
    Sub-category:
    Impact of SEC Actions, Adequacy of Evidence
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