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    PCAOB Inspection Consequences, Processes, and Inspection...
    research summary posted October 22, 2014 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.04 Impact of 404, 01.05 Impact of SOX 
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    Title:
    PCAOB Inspection Consequences, Processes, and Inspection Team Performance: Perspectives of Triennially Inspected Firms
    Practical Implications:

    The results of this study are important to practitioners, regulators, legislators, academicians, and other market participants as many aspects of SOX and PCAOB inspections have been criticized. Oversight bodies have modified SOX in response to concerns of oversight groups (Advisory Committee on Smaller Public Companies). Researchers and practitioners have called for research to study the impact of SOX on audit quality and the public interest. The Government Accountability Office (GAO), required by SOX to study the potential effects of further mandates, chose to wait several years to monitor and evaluate the effectiveness of SOX and the PCAOB on auditor independence and audit quality before proposing any further modifications (GAO 2004). We interpret our findings as suggesting the efficacy of PCAOB inspections may be enhanced by focusing on potential unintended consequences and inspection process modifications rather than on inspectors’ qualifications and actions.

     

    For more information on this study, please contact Brian Daugherty at University of Wisconsin-Milwaukee.

    Citation:

    Daugherty, B., and W. Tervo. 2010. PCAOB Inspection Consequences, Processes, and Inspection Team Performance: Perspectives of Triennially Inspected Firms. Accounting Horizons 24 (2):189-219.

    Keywords:
    PCAOB inspections: registered auditing firms: Sarbanes-Oxley; peer review
    Purpose of the Study:

    We solicit perceptions of the Public Company Accounting Oversight Board’s (PCAOB) inspection process from the leadership of triennial firms (100 or fewer publicly-traded audit clients, inspected triennially) receiving their initial inspection through the use of a survey. Our research is motivated by a growing stream of research related to triennial firms. Practitioners have called for research to determine if the performance of audits in the Sarbanes-Oxley era may fail to attain the stated objective of enhancing investor confidence in the capital markets. 

    Design/Method/ Approach:
    • Through December 2007, over 1,800 firms and affiliates were registered with and approved by the PCAOB to conduct audits of U.S. registrants, and 467 triennial firms had their initial inspection report posted on the PCAOB’s website. Instruments were mailed from 9/2007 to 1/2008.
    • We asked that the research instrument be completed by the person in each firm most closely involved with PCAOB inspections. 
    • A number of statements were designed to have participants evaluate consequences resulting from initial PCAOB inspections (Consequences), evaluate the inspection process (Process), and rate the performance of their PCAOB inspection team (Team). Consequence statements seek perceptions related to the influence of PCAOB inspections on overall audit quality, the ability to accept and retain public audit clients, public confidence in the audit profession, personnel time incurred in anticipation of inspection, incremental fees billed to clients as a result of inspection, recruitment and retention matters, and litigation risk. Process statements cover inspectors’ criticisms, engagement selection, time devoted to inspection, and confidentiality of findings related to firms’ QC systems and also gauge firms’ level of agreement with inspectors’ findings and evaluations of PCAOB inspections relative to the prior peer-review process. Team statements include those related to the technical knowledge and professional conduct of inspectors as well as the appropriateness of their focus on workpaper documentation, substantive procedures, and internal control audits.
    Findings:
    • Smaller respondents reported initial PCAOB inspections resulted in a negative impact on many aspects of their audit practices while medium and larger firms reported more favorable consequences.
    • Firms with reports released earlier in the initial inspection cycle reported negative consequences that appear to diminish as the process matures.
    • Results suggest very small triennial firms may be ceasing the performance of audits of public enterprises as a result of PCAOB inspections.
    • Smaller triennial firms disagree the PCAOB inspection process increases overall audit quality (contrary to the stated intentions of SOX) and both smaller and medium firms do not view PCAOB inspections as positively impacting their audit business.
    • Respondents generally evaluated inspectors’ performance in favorable terms but were much more critical of the inspection process itself.
    • An overriding concern of many inspected firms is the perception that inspectors are, in many cases, substituting their own judgment for the auditor’s professional judgment in determining whether audit engagements comply with applicable professional standards. This possibility is particularly troubling given the auditors’ direct interaction with client personnel and audit committee members in an ex-ante setting while PCAOB inspections are, by definition, conducted in an ex-post setting with minimal or no audit client contact.
    • Firms evaluated their initial inspection team’s performance favorably, but were more critical of the inspection process itself. Levels of satisfaction with nearly all aspects of PCAOB inspections appear to increase with firm size and the passage of time. 
    Category:
    Standard Setting
    Sub-category:
    Impact of PCAOB, Impact of SOX