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  • Jennifer M Mueller-Phillips
    Client Stock Market Reaction to PCAOB Sanctions Against a...
    research summary posted July 30, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 11.0 Audit Quality and Quality Control 
    Title:
    Client Stock Market Reaction to PCAOB Sanctions Against a Big 4 Auditor.
    Practical Implications:

    The authors provide evidence on the PCAOB actions by showing that the PCAOB’s sanctions against Deloitte contain information useful to market participants. When public disclosure of a quality control problem is made by the PCAOB, investors react by discounting their valuation of that audit firm’s clients. Clients value disclosures about control weaknesses found at audit firms.

    Citation:

    Dee, C. C., Lulseged, A., & Zhang, T. 2011. Client Stock Market Reaction to PCAOB Sanctions Against a Big 4 Auditor. Contemporary Accounting Research 28 (1): 263-291.

    Keywords:
    quality standards, auditing standards, sanctions, quality of service, quality assurance
    Purpose of the Study:

    Audits are valued by investors, because they assure the reliability of and reduce the uncertainty associated with financial statements. Any such value derived from the audit is related to its perceived quality, and damage to an audit firm’s reputation can reduce the credibility of financial statements audited by the firm. The authors examine the stock market effects of news of the Public Company Accounting Oversight Board’s (PCAOB) sanctions imposed upon Deloitte and Touche, LLP (Deloitte) on December 10, 2007 for actions related to its 2003 audit of Ligand Pharmaceuticals Incorporated (Ligand). Deloitte was censured and fined one million dollars. The engagement partner responsible for the Ligand audit was banned from association with a registered accounting firm. These sanctions mark the first time the PCAOB has used its enforcement powers against a Big 4 auditor (or any national or international firm), as well as the first time the PCAOB has issued a monetary penalty against any individual or registered accounting firm.

    The PCAOB order against Deloitte contains three potentially value-relevant pieces of information. First, it shows that Deloitte did not conduct a quality audit of Ligand’s 2003 financial statements. Second, it highlights serious problems in Deloitte’s quality control policies and procedures that go beyond the Ligand audit failure. Finally, the PCAOB order reiterates the remedial actions Deloitte took to improve its quality control policies, which may alleviate investors’ concerns and signal improvements in the quality of the firm’s future audits.

    Design/Method/ Approach:

    The authors apply the market model to estimate expected returns over the period from 260 days before through 10 days before December 10, 2007  the date the PCAOB made public its sanctions against Deloitte. Using Audit Analytics and COMPUSTAT, the authors build a final sample that includes 707 Deloitte and 2,363 non-Deloitte clients.

    Findings:
    • Deloitte clients have a significantly negative market reaction to news of the PCAOB sanctions over one- and three-day event windows.
    • Non-Deloitte clients show no significant reaction to news of the PCAOB sanctions against Deloitte.
    • The lack of significance for non-Deloitte clients suggests that the results are not driven by uncontrolled factors common to clients of Big 4 auditors. There is no evidence of spillover effects to clients of other Big 4 auditors.
    • The negative effects of information contained in the PCAOB order against Deloitte outweigh any possible remedial effects coming from news of Deloitte’s corrective actions taken after the sanctions.
    • Deloitte clients had no reaction to other events specifically related to the Ligand audit failure that predate the sanctions. Thus, the evidence shows that the PCAOB sanctions revealed value-relevant information about Deloitte’s reputation or insurance value that was not contained in the other Ligand events.
    • The negative market effects observed are most likely the result of the news of the control weaknesses at Deloitte rather than events specific to the Ligand audit.
    • There is more negative reaction to news of the PCAOB sanctions against Deloitte for firms that are financially distressed.
    Category:
    Audit Quality & Quality Control, Standard Setting
    Sub-category:
    Impact of PCAOB
  • Jennifer M Mueller-Phillips
    Did the 2007 PCAOB Disciplinary Order against Deloitte...
    research summary posted July 27, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 11.0 Audit Quality and Quality Control 
    Title:
    Did the 2007 PCAOB Disciplinary Order against Deloitte Impose Actual Costs on the Firm or Improve Its Audit Quality?
    Practical Implications:

    The results suggest that the PCAOB censure imposed actual costs on Deloitte by adversely affecting its switching risk and lowering audit fees. However, Deloitte’s audit quality appears to be no different from that of the other Big 4 firms during a three-year period either before or after the censure. Thus, the findings suggest that PCAOB censure can inflict actual harm on a Big 4 auditor by adversely impacting audit committee perceptions of the firm’s audit quality, but without an observable improvement in the firm’s audit outcomes as reflected in the audit quality metrics.

    Citation:

    Boone, J. P., Khurana, I. K., & Raman, K. K. 2015. Did the 2007 PCAOB Disciplinary Order against Deloitte Impose Actual Costs on the Firm or Improve Its Audit Quality? Accounting Review 90 (2): 405-441.

    Keywords:
    audit fees, Big 4 audit quality, PCAOB censure, switching risk
    Purpose of the Study:

    The December 2007 disciplinary order of Deloitte was unprecedented for a Big 4 firm, representing the first-ever public censure of a Big 4 firm by the PCAOB. These disciplinary proceedings followed up on a prior-year inspection report by publicly censuring Deloitte for violations of auditing standards in connection with the 2003 audit of Ligand Pharmaceuticals. Notably, the December 2007 censure came about more than three years after Deloitte’s resignation from the Ligand engagement in August 2004, and more than two years after the audit failure became public information in May 2005, when Ligand restated its financial statements for 20032004.

    The authors investigate the nature of the actual costs imposed on Deloitte by the December 2007 disciplinary order issued against the firm by the Public Company Accounting Oversight Board (PCAOB). That is, the authors examine whether Deloitte’s switching risk in terms of the likelihood of losing existing clients to other Big 4 firms or attracting new clients and audit fees changed following the PCAOB censure. They also examine whether the PCAOB censure improved Deloitte’s audit quality relative to that of the other Big 4 firms during the three years following the PCAOB censure.

    Design/Method/ Approach:

    The authors use four samples to test their hypotheses using ordinary least squares regression models. They used Audit Analytics and Compustat data with fiscal years between 2005 and 2010, resulting in a sample of 10,013 firm-year observations. Within this sample the authors derived three smaller samples to run further tests.

    Findings:
    • The 2007 PCAOB disciplinary order against Deloitte imposed significant actual costs on the firm, as measured by a subsequent change in Deloitte’s switching risk in the form of an increase in the firm’s existing client loss rate to other Big 4 firms and a drop in the client gain rate.
    • Deloitte reduced the rate at which they were escalating fees over a three-year period following the censure to stem the tide of client defections to other Big 4 auditors.
    • Deloitte’s audit quality was no different from that of the other Big 4 firms during either the pre-censure (20052007) or the post censure (20082010) time periods.
    • Collectively, these results are consistent with the notion that PCAOB oversight during the 20052010 period of the study was focused more on documentation and substantiation compliance than on a holistic assessment of a Big 4 auditor’s brand name service quality.
    • It is possible that Deloitte’s audit quality improved after the censure, but the authors were unable to detect the improvement based on existing methods.
    Category:
    Audit Quality & Quality Control, Standard Setting
    Sub-category:
    Impact of PCAOB
  • Jennifer M Mueller-Phillips
    Perspectives on the Public Company Accounting Oversight...
    research summary posted July 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB 
    Title:
    Perspectives on the Public Company Accounting Oversight Board (PCAOB) 2004–2005.
    Practical Implications:

    The author recommends that academics avail themselves of fellowship opportunities with the SEC and PCAOB.

    Citation:

    Bailey Jr., A. D. 2014. Perspectives on the Public Company Accounting Oversight Board (PCAOB) 200052005. Accounting Horizons 28 (4): 889-899.

    Keywords:
    auditing standards, PCAOB
    Purpose of the Study:

    The topics covered in this commentary include:

    1. Early staff relations between the PCAOB and SEC in their respective roles of audit standard setter and oversight agency
    2. The PCAOB decision to act as the sole audit standard setter for registered public companies displacing the AICPA in this role;
    3. The PCAOB’s approach to ‘‘revising’’ the interim audit standards through Rule 3101, Certain Terms Used in Auditing and Related Professional Practice Standards;
    4. Audit Standard 3 (AS3), Audit Documentation; and
    5. Audit Standard 2 (AS2), An Audit of Internal Control over Financial Reporting Performed in Conjunction With an Audit of Financial Statements.
    Design/Method/ Approach:

    This commentary reflects the author’s experiences with the U.S. Securities and Exchange Commission (SEC) during the academic year 2000/2001 (Academic Fellow) and the two calendar years 20042005 (Deputy Chief Accountant [Professional Practice]).

    Findings:

    The author found that the SEC, and the PCAOB standards group cultures were an interesting cross between a practice domain and an academic domain. While each tends to have a very pragmatic view, they also tend to reach beyond the immediate issues in an effort to craft longer-term viable solutions as compared to what the field practitioner likely sees as an issue in need of an immediate answer today. Unlike in academia, each of these groups is faced with the need for resolutions “today” in the face of too little or non-existent evidence. This is both a problem for them and a liberating aspect of their work. The academic can wait while gathering more evidence, while in the practice domain action will be taken, if not by a standard setter, then by the practitioner in the field. The interaction of practice and the academy will continue to be one of partnership and conflict. The author hopes academia will retain enough independence from the profession to sustain its role as a positive critic of practice.

    Category:
    Standard Setting
    Sub-category:
    Impact of PCAOB
  • Jennifer M Mueller-Phillips
    Reflections on the Establishment of the PCAOB and Its Audit...
    research summary posted July 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB 
    Title:
    Reflections on the Establishment of the PCAOB and Its Audit Standard-Setting Role.
    Practical Implications:

    The divergence in the importance of the long-term reputation of the firm versus the short-term incentives for partners should be factored into future research. Returning to the role of auditing academics and educators, the big topics and the related accounting and auditing scandals should be incorporated into the basic auditing course to a much greater extent. Several good books on contemporary cases facilitate this. Also, coverage of legal liability should include the litigation process.  Auditing academics and educators can significantly enhance future auditing standards with their research and can mold students into future lead partners who understand there is no place in the world for auditors if their reports are not respected as reliable.

    Citation:

    Carmichael, D. R. 2014. Reflections on the Establishment of the PCAOB and Its Audit Standard-Setting Role. Accounting Horizons 28(4): 901-915.

    Keywords:
    auditing standards, PCAOB
    Purpose of the Study:

    This paper is an essay on the causes of the establishment of the PCAOB as the U.S. regulator of auditors of the financial statements of public companies, and the key developments in its role as a professional standard setter.

    Design/Method/ Approach:

    The author, a standard setter, educator and litigation consultant shares his perspective of the PCAOB. He spent nearly 14 years working at the AICPA on the establishment of public standards and was named the first Chief Auditor of the Public Company Accounting Oversight Board (PCAOB).

    Findings:

    Looking at the events and circumstances that led to the creation of the PCAOB, including particularly the outsized influence of accounting and auditing scandals, a few big topics stand out with regards to the need for research:

    • Fraud detection- How can standards and practice be changed to make auditors more effective at detecting material misstatements due to fraud? Why have auditors failed to detect major frauds? What changes are necessary in firm methodologies and reward systems for lead partners and the engagement team?
    • Independence, Objectivity, and Integrity- How can standards and practice be changed to make the primary focus of the lead partner and the engagement team be protecting investors? Professional skepticism is an important subset of this topic. What is necessary to make the construct that the auditor’s primary allegiance is to the investing public a reality?
    • Liability- How has it affected auditing standards and practice? Concerns about legal liability have had a significant behind-the-scenes effect on auditing standards and practice. Yet there is relatively little effort to understand this influence. Legal liability is viewed as a threat and negative consequence rather than one of the necessary mechanisms of accountability.
    Category:
    Standard Setting
    Sub-category:
    Impact of PCAOB
  • Jennifer M Mueller-Phillips
    A Decade after Sarbanes-Oxley: The Need for Ongoing...
    research summary posted July 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB 
    Title:
    A Decade after Sarbanes-Oxley: The Need for Ongoing Vigilance, Monitoring, and Research.
    Practical Implications:

    This paper provides views on many areas within the auditing profession that would benefit from further research and analysis, as well as opportunities for research that could be useful to the PCAOB as it considers current and future regulatory priorities.

    Citation:

    Franzel, J. M. 2014. A Decade after Sarbanes-Oxley: The Need for Ongoing Vigilance, Monitoring, and Research. Accounting Horizons 28 (4): 917-930. 

    Keywords:
    auditing quality, audit research, PCAOB, Public Company Accounting Oversight Board, Sarbanes-Oxley Act
    Purpose of the Study:

    After more than a decade since passage of the Sarbanes-Oxley Act and the creation of the Public Company Accounting Oversight Board (PCAOB), it is appropriate and necessary to ask questions about the present state of audit quality and evaluate the impact and effectiveness of PCAOB’s oversight programs. Written from the viewpoint of a current PCAOB Board member and former Managing Director of the U.S. Government Accountability Office (GAO), this paper discusses the warning signs of serious auditing problems in the years preceding the Act, and the role that the GAO played in analyzing those risks and calling for greater oversight of the accounting profession’s auditing public companies.

    Design/Method/ Approach:

    This paper provides the perspective of the author, a current PCAOB Board member, on the major issues debated during the development and passage of the Sarbanes-Oxley Act, specifically related to the oversight of the auditing profession and the creation of the PCAOB.

    Findings:

    The interrelated nature of corporate governance, accounting and financial reporting, the auditing of financial statements, and oversight of the accounting profession call on all stakeholders to work vigilantly to ensure the integrity of each aspect of this system. All participants need to be alert to warning signs and red flags and respond appropriately to maintain integrity and the public trust. Failure in any of these areas places a strain on the entire system and could threaten the capital markets and greater economic well-being. The successful functioning of this system also relies on academic researchers. The academic community plays a key role in this system of vigilance by conducting research and analysis, monitoring the strengths and weaknesses of the system at any given time, evaluating performance, across the financial system, studying the impact of specific actions, and generating recommendations for change. In addition, success of the entire system relies on educators preparing future members of the profession to successfully assume and carry out their responsibilities in maintaining integrity and public trust, while protecting investors and the public interest.

    Category:
    Standard Setting
    Sub-category:
    Impact of PCAOB
  • Jennifer M Mueller-Phillips
    A Former PCAOB Board Member Looks to the Past...and to the...
    research summary posted July 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB 
    Title:
    A Former PCAOB Board Member Looks to the Past...and to the Future.
    Practical Implications:

    Bill Gradison believes that an appropriate and effective way to protect the investor would be to share its wealth of data with protections of confidentiality with outside group, especially of those in academia, to foster research that might shed light on the importance of investor protection and how best to protect investors in the future.

    Citation:

    Gradison, B. 2014. A Former PCAOB Board Member Looks to the Past...and to the Future. Accounting Horizons 28 (4): 931-935.

    Keywords:
    auditing standards, Public Company Accounting Oversight Board
    Purpose of the Study:

    The Public Company Accounting Oversight Board (PCAOB) is still a relatively new entity, compared with most government agencies. The author of this paper, Bill Gradison, was a Founding Member of the PCAOB with many insights on the workings and challenges of the Board. The world has changed since 2002 when Sarbanes-Oxley became law with almost unanimous Congressional support. It would be most unlikely to be passed into law today. Thus, the Board not only has the challenge and the responsibility to carry out its Congressional mandate but also to champion the cause of investor.

    Design/Method/ Approach:

    Bill Gradison, a Founding Member of the Board, shares his perspectives on the work of the PCAOB during its early years.

    Findings:

    The five major challenges facing the Board as of January 2011.

    1. Current inability to conduct inspections in the EU, Switzerland, and China;
    2. Major changes in accounting standards;
    3. New authority to inspect and if necessary discipline auditors of broker-dealers;
    4. Ongoing recruiting challenges; and
    5. Fee pressures being experienced by public company auditors.
    Category:
    Standard Setting
    Sub-category:
    Impact of PCAOB
  • Jennifer M Mueller-Phillips
    A Perspective on the PCAOB - Past and Future.
    research summary posted July 21, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 01.06 Impact of PCAOB 
    Title:
    A Perspective on the PCAOB - Past and Future.
    Practical Implications:

    The quality of the firm performing the audit is important but must be viewed through the perspective of a specific engagement team and a specific set of circumstances. Information supplied by the PCAOB is one component of the evaluation of the likelihood that an engagement team will perform a quality audit and of specific areas of audit practice where deficiencies have been identified. In the end, however, issues of independence, auditor rotation, industry competence, attention to the work, and all the other important aspects of audit quality must be monitored by the audit committee at the engagement level in the context of the specific engagement.

    Citation:

    Wedemeyer, P. D. 2014. A Perspective on the PCAOBPast and Future. Accounting Horizons 28 (4): 937-947.

    Keywords:
    internal auditing, auditing standards, PCAOB, Sarbanes-Oxley
    Purpose of the Study:

    The passage of Sarbanes-Oxley (SOX), the creation of the Public Company Accounting Oversight (PCAOB), and subsequent developments have substantially increased the political visibility of auditors and audits of financial statements. These same events have substantially decreased the role of the auditing profession in establishing audit standards and standards of audit performance; auditing is now an industry regulated primarily by persons who are not professional auditors. The perceived interest of each of the parties involved in the political process is often in conflict with those of any, or all, of the other parties.

    The author’s primary concern is the quality of the audit performed on a specific engagement.

    Design/Method/ Approach:

    This paper summarizes and synthesizes information on the PCAOB and its effect on the business model of an audit firm.

    Findings:

    SOX requirements for PCAOB inspections of audit firms substantially increased the possibility that an audit will be subsequently evaluated despite the absence of identified errors in audited financial statements. The SOX requirement for an auditor's opinion on internal controls over financial reporting (ICFR) immediately increased audit costs. The net effect of these changes has been to increase the cost of audits, particularly as a result of increased review, other quality control activities, and the performance of audits of ICFR, where required. In return, the quality of audits in terms of compliance with audit standards has improved significantly. However, the business models of audit firms and the processes for education and certification of accountants have remained substantially unchanged and are major influences on the quality of audits.

    Category:
    Standard Setting
    Sub-category:
    Impact of PCAOB, Impact of SOX
  • 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
  • Jennifer M Mueller-Phillips
    PCAOB Quality Control Inspection Reports and Auditor...
    research summary posted February 15, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 11.0 Audit Quality and Quality Control, 11.11 Impact of Firm and External Inspection Programs 
    Title:
    PCAOB Quality Control Inspection Reports and Auditor Reputation
    Practical Implications:

    The results of this study are important in considering what should be produced from PCAOB inspections of audit firms. Evidence indicates that clients use the information provided by Part II of the PCAOB inspection reports to choose a high quality audit firm. Perhaps producing a quality control report with every PCAOB inspection report would be helpful to clients in analyzing the audit firm and potentially improving overall audit quality.

    For further information on this study, please contact Albert L. Nagy.

    Citation:

    Nagy, Albert L. 2014. PCAOB Quality Control Inspection Reports and Auditor Reputation. Auditing: A Journal of Practice & Theory 33 (3): 87-104.

    Keywords:
    audit quality signals, PCAOB inspections, quality controls
    Purpose of the Study:

    This study focuses on the informational value of the quality control criticisms disclosed in Part II of PCAOB inspection reports. Part II of the report becomes public only if a firm fails to satisfactorily remediate the quality control deficiencies within a 12-month period. This study examines the change in audit firms' market share following the public disclosure of Part II. The results show that audit firms lose a significant amount of market share following the public disclosure of quality control criticisms, and suggest such a disclosure provides a credible signal of auditor quality to audit clients.

    Design/Method/ Approach:

    Firms analyzed were United States based, non-dark audit firms included in the Audit Analytics database from 2007 to 2012. All firms were inspected by the PCAOB and reports were posted on the PCAOB website. The market share changes for the quality control (QC) report release were measured for the year immediately following the public disclosure of the QC report. The non-QC report observations’ market changes were measured for the calendar years of the sample period.  The sampled observations were used to estimate an OLS regression model to determine whether QC reports have an effect on changes of audit firms’ market share.  

    Findings:

    The regression results of this study show that audit firms associated with publicly disclosed QC reports lose a greater amount of market share in the subsequent year than those firms not associated with a QC report. These results suggest that audit clients associate QC reports as a credible signal of low audit quality and, thus, are less likely to retain and hire audit firms involved with such a report. 

    Category:
    Audit Quality & Quality Control, Standard Setting
    Sub-category:
    Impact of Firm & External Inspection Programs, Impact of PCAOB

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