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  • The Auditing Section
    Auditor Standard Setting and Inspection for U.S. Public...
    research summary posted April 13, 2012 by The Auditing Section, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 01.06 Impact of PCAOB 
    Title:
    Auditor Standard Setting and Inspection for U.S. Public Companies:
    Practical Implications:

    The authors hope to generate discussion and reform of accounting and auditing regulation, specifically with respect to the PCAOB, based upon the observations and points below. 

    • The authors believe that the audit “profession lost sight of its core values such as independence, high-quality audits, and responsibility to the public trust.  …in many ways, SOX led to a justified back-to-basics focus within the largest international accounting firms.”
    • Under the Auditing Standards Board (ASB), the United States was the global leader in auditing standard-setting.  There are currently three sets of auditing standards that may govern an audit:  the ASB, the PCAOB and the International Auditing and Assurance Standards Board (IAASB). 
    • Auditors of publicly held companies will continue to audit against audit standards sponsored by several different standard setters in efforts to conduct high quality audits. Audit quality will continue to be a high priority of regulators and the firm’s quality control functions.  Coordinating the various standard setters’ requirements into a single quality control system for firms will be a challenge.
    • In an effort to increase independence of standard-setting from the audit profession, the PCAOB has adopted a non-expert model.  The resulting standards may be costly and of poor quality.
      • PCAOB inspections are not able to conduct risk-based inspections.
      • Inspection reports do not adequately distinguish between trivial and significant findings for the public to understand whether the audit itself is of adequate quality.
      • Inspection reports are issued so late as to be of little value in the subsequent audit.
    • The PCAOB should reconsider its standard-setting and inspection processes.
      • Standard-setting should be better aligned with the process of financial accounting standards.  Specifically, the standards should be set by the profession with oversight by the PCAOB.  The analogy is that FASB sets the accounting standards with oversight by the SEC.  Alternatively, the PCAOB should adopt the IAASB/ASB standards.  Either approach utilizes the expertise not currently resident in the PCAOB and reduces the complexity and number of standards a firm must follow in conducting a quality audit.
      • Although the AICPA peer inspection process has weaknesses, it leverages industry and technical expertise that is currently lacking in the PCAOB process.   The authors recommend a “peer enhanced” federal inspection.  With direction and scope provided by the PCAOB, and inspections by industry expert peers, the inspections would improve at a reduced PCAOB cost.
      • Transparency should be a priority of the PCAOB in standard-setting as well as reporting of inspection findings.  In addition, a resolution process should be implemented so disputes between the inspection team and the firm can be resolved.
    Citation:

    Glover, S.M., D. F. Prawitt, and M. H. Taylor. 2009. Auditor standard setting and inspection for U.S. public companies:  A critical assessment and recommendations for fundamental change.  Accounting Horizons 23 (2): 221-237.

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  • Jennifer M Mueller-Phillips
    Auditor-provided nonaudit services and audit effectiveness...
    research summary posted March 10, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 11.0 Audit Quality and Quality Control, 11.08 Proxies for Audit Quality 
    Title:
    Auditor-provided nonaudit services and audit effectiveness and efficiency: Evidence from pre-and post-SOX audit report lags
    Practical Implications:

    The results of this study have important implications for regulators, the accounting profession, and clients concerned with the escalating costs of the audit:

    • This study extends prior empirical evidence by showing that the joint provision of audit and nonaudit services does not reduce audit quality even when audit lags are shorter due to potential knowledge spillover
    • It also suggests that audit efficiencies may flow from the joint provision of audit and nonaudit services. The loss of potential synergies between audit and nonaudit services following the SOX ban on most auditor-provided nonaudit services will impose a greater cost burden on firms and may lead to lower audit quality.
    • The significance of audit lag as a determinant of reporting timelines is even more important in an era of accelerated SEC filing.

    For more information on this study, please contact Robert Knechel.

    Citation:

    Knechel, W. R., and D. S. Sharma. 2012. Auditor-provided nonaudit services and audit effectiveness and efficiency: Evidence from pre-and post-SOX audit report lags. Auditing: A Journal of Practice & Theory 31(4): 85-114.

  • Jennifer M Mueller-Phillips
    Chief Audit Executives’ Evaluations of Whistle-Blowing A...
    research summary posted October 24, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 12.0 Accountants’ Reports and Reporting, 12.04 Investigations, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting 
    Title:
    Chief Audit Executives’ Evaluations of Whistle-Blowing Allegations
    Practical Implications:

    The findings of this study should be of interest to boards of directors, audit committees, and senior management who are accountable to investors and other parties for the timely and unbiased examination of whistle-blowing allegations. Prior research has shown that audit committee members can be biased in their evaluations of whistle-blower allegations and in the allocation of resources to investigate those allegations. However, the results of this study show that CAEs do not exhibit the same bias as audit committee members for allocating resources to investigate whistle-blower allegations. The audit committee often relies on the CAE to investigate whistle-blowing reports, and this study suggests that CAEs may be a better choice for managing the evaluation of whistle-blowing allegations relative to members of the audit committee. CAEs’ decisions are not shrouded in secrecy, and CAEs report to both management and the audit committee, creating multiple levels of accountability. They are less able to ignore allegations that pose personal threats than are directors.

    Citation:

    Guthrie, C. P., C. S. Norman, and J. M. Rose. 2012. Chief Audit Executives’ Evaluations of Whistle-Blowing Allegations. Behavioral Research in Accounting 24(2): 87-99.

  • Jennifer M Mueller-Phillips
    Determinants of the Persistence of Internal Control...
    research summary posted October 31, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 07.0 Internal Control, 07.04 Assessing Remediation of Weaknesses 
    Title:
    Determinants of the Persistence of Internal Control Weaknesses
    Practical Implications:

    Effective corporate governance of both the IT and non-IT domains is pivotal in establishing and maintaining strong internal controls over financial reporting. While credit agencies examine entity-level deficiencies as a possible indicator for downgrading a firm’s rating, account-level deficiencies are associated with long-term effects on internal control as well.

    Consideration of the types of MWs and the specific underlying deficiencies should be important to interested stakeholders: auditors, as they assess and evaluate risk and controls; rating agencies, as they evaluate credit worthiness; investors and analysts, as they evaluate the value of the firm; and management and audit committees, as they consider investments in controls.

    For more information on this study, please contact Marcia Weidenmier Watson.
     

    Citation:

    Klamm, B. K., K. W. Kobelsky, and M. W. Watson. Determinants of the Persistence of Internal Control Weaknesses. Accounting Horizons 26 (2): 307-333.

  • Jennifer M Mueller-Phillips
    Did SOX Influence the Association between Fee Dependence and...
    research summary posted February 20, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 04.0 Independence and Ethics, 04.02 Impact of Fees on Decisions by Auditors & Management, 09.0 Auditor Judgment, 09.04 Going Concern Decisions 
    Title:
    Did SOX Influence the Association between Fee Dependence and Auditors’ Propensity to Issue Going-Concern Opinions?
    Practical Implications:

    This research note presents evidence that the question of whether new standards or regulations have achieved the objective of altering the behavior of their intended target cannot be adequately assessed shortly after they have come into effect, as the implementation often requires a steep learning curve and is frequently accompanied by intense public debates and media scrutiny. From the policy standpoint, it suggests that the concern expressed by the U.S, Treasury Department officials about auditors’ applying an overly strict approach in their audits to counter elevated liability after SOX may not be warranted.

    For more information on this study, please contact Wenjun Zhang.

    Citation:

    Kao, J. L., Y. Li., and W. Zhang. 2014. Did SOX influence the association between fee dependence and auditors’ propensity to issue going-concern opinions? Auditing: A Journal of Practice and Theory 33 (2): 165-185

  • Jennifer M Mueller-Phillips
    Do Former Audit Firm Partners on Audit Committees Procure...
    research summary posted April 17, 2014 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 04.0 Independence and Ethics, 04.03 Non-Audit Services, 13.0 Governance, 13.01 Board/Audit Committee Composition 
    Title:
    Do Former Audit Firm Partners on Audit Committees Procure Greater Nonaudit Services from the Auditor?
    Practical Implications:

    This study presents new evidence that suggests the presence of AFAPs and UFAPs on the audit committee has the potential to reduce threats to auditor independence by pre-approving the purchase of less NAS form the auditor. The findings of this study are consistent with the view that AFAPs serving as independent audit committee members appear not to make economic decisions in favor of their former audit firm, and, thus, may be exercising objective and independent oversight to enhance auditor independence. This evidence is also in line with the goal of SOX to reduce actual or perceived threats to auditor independence. From a regulatory perspective, the findings suggests that concerns about audit firm alumni on client’s audit committees may not be warranted in the post-SOX environment and the three-year cooling period rule may be unnecessary. However, further research in other contexts is needed.

    For more information on this study, please contact Vic Naiker.
     

    Citation:

    Naiker, V., D. S. Sharma, and V. D. Sharma. 2013. Do Former Audit Firm Partners on Audit Committees Procure Greater Nonaudit Services from the Auditor? The Accounting Review 88 (1): 297–326.

  • The Auditing Section
    Do Investors’ Perceptions Vary with Types of Nonaudit F...
    research summary posted April 13, 2012 by The Auditing Section, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 04.01 Scope of Services, 04.02 Impact of Fees on Decisions by Auditors & Management, 04.03 Non-Audit Services, 04.08 Impact of SEC Rules Changes/SarbOx 
    Title:
    Do Investors’ Perceptions Vary with Types of Nonaudit Fees? Evidence from Auditor Ratification Voting
    Practical Implications:

    This paper added to the discussion on what types of services audit firms should and should not provide to their audit clients. The evidence in this paper supports the view that investors do not view tax services provided to audit clients in the same light as audit-related services.  The findings of this study are relevant to managers and boards of directors who purchase non-audit services (audit-related, tax or other) from the external auditor.  This study is also useful to practicing auditors to address audit committee concerns on non-audit services.

    Citation:

    Mishra, S., K. Raghunandan, and D.V. Rama. 2005. Do Investors’ Perceptions Vary with Types of Nonaudit Fees? Evidence from Auditor Ratification Voting. Auditing: A Journal of Practice & Theory 24 (2): 9-25.

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  • Jennifer M Mueller-Phillips
    Home Country Investor Protection, Ownership Structure and...
    research summary posted July 29, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 01.05 Impact of SOX, 07.0 Internal Control, 07.05 Impact of 404 on Fees and Financial Reporting Quality 
    Title:
    Home Country Investor Protection, Ownership Structure and Cross-Listed Firms’ Compliance with SOX-Mandated Internal Control Disclosures.
    Practical Implications:

    The results carry important implications for regulators, investors, and researchers. The findings suggest both firm-level corporate governance and home country investor protection still matter in explaining the disclosure behavior of cross-listed firms. Hence, it may be warranted for U.S. securities regulators to devote more resources to monitoring the financial disclosure quality of CONTROL_WEDGE firms from weak investor protection countries. The results suggest that U.S. investors should pay closer attention to the financial disclosure quality of cross-listed firms, especially CONTROL_WEDGE firms from weak investor protection countries. This is important because the recent accounting frauds involving cross-listed firms suggest that U.S. investors might not have paid sufficient attention to the disclosure quality, and as a result suffered significant economic losses after the revelation of the accounting frauds.

    Citation:

    Gong, G., Ke, B., & Yu, Y. 2013. Home Country Investor Protection, Ownership Structure and Cross-Listed Firms' Compliance with SOX-Mandated Internal Control Deficiency Disclosures. Contemporary Accounting Research 30 (4): 1490-1523. 

  • Jennifer M Mueller-Phillips
    Insider Trading, Litigation Concerns, and Auditor...
    research summary posted September 14, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 06.0 Risk and Risk Management, Including Fraud Risk, 06.09 Litigation Risk, 12.0 Accountants’ Reports and Reporting, 12.01 Going Concern Decisions 
    Title:
    Insider Trading, Litigation Concerns, and Auditor Going-Concern Opinions.
    Practical Implications:

    The study offers two primary contributions. First, it provides insight into the incentive effect of corporate insider trading on auditor behavior. The study helps to fill this gap by providing evidence on the relationship between managers’ incentives and auditors’ opinions. Second, this study adds to the literature on insider trading. The evidence extends this literature by showing that insiders’ incentives to sell and their desire to avoid litigation can influence auditors’ reports.

    Citation:

    Chen, C., X. Martin, and X. Wang. 2013. Insider Trading, Litigation Concerns, and Auditor Going-Concern Opinions. Accounting Review 88 (2): 365-393.

  • Jennifer M Mueller-Phillips
    Internal Audit Outsourcing and the Risk of Misleading or...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 04.0 Independence and Ethics, 04.03 Non-Audit Services 
    Title:
    Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get It Wrong?
    Practical Implications:

    The results of this study support the knowledge spillover argument — that financial reporting quality improves when the external auditor performs at least some internal audit work. In addition, the authors found evidence that higher quality IAFs, regardless of outsourcing arrangement, are associated with lower accounting risk. This study also provides insights on the impact of the SOX prohibition on external auditors’ provision of internal audit services to their clients, and provides evidence concerning whether private companies may benefit from a similar practice. Finally, this study provides insight on how increased interaction among different parties involved in corporate governance can positively influence financial reporting quality.

    Citation:

    Prawitt, D. F., N. Y. Sharp, and D. A. Wood. 2012. Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get It Wrong? Contemporary Accounting Research 29(4): 1109-1136.

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