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    Is Self-Regulated Peer Review Effective at Signaling Audit...
    research summary posted May 7, 2012 by The Auditing Section, last edited May 25, 2012, tagged 11.0 Audit Quality and Quality Control, 11.11 Impact of Firm and External Inspection Programs 
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    Title:
    Is Self-Regulated Peer Review Effective at Signaling Audit Quality?
    Practical Implications:

    The results of this study are important for regulators and audit firms to consider as they indicate that peer-review reports credibly capture the actual audit quality of an audit firm and support the effectiveness of a self-regulated peer-review system. Regulators may find these results useful as part of their continuing oversight of the peer-review process since most firms continue to rely on self- regulated peer reviews to guide their quality-control efforts.

    Citation:

    Casterella, J. R., K. L. Jensen, and W. R. Knechel. 2009. Is Self-Regulated Peer Review Effective at Signaling Audit Quality?  The Accounting Review 84 (3) 713-735.

    Keywords:
    Peer review; audit quality; litigation risk
    Purpose of the Study:

    For over 30 years the AICPA has used a system of self-regulated peer reviews as one of its primary methods of controlling audit quality. The underlying concern is that the general lack of independence among reviewers and reviewees reduces the peer-review process to an ineffective, ceremonial checklist. However, the key to determining whether peer review is effective is to examine whether it successfully identifies quality differences among audit firms. This paper addresses this point by investigating whether peer reviews conducted under the AICPA’s self-regulatory model have been effective at signaling actual audit quality. Below are two objectives that the authors address in their study: 

    • Examine the likelihood that audit failure (i.e. poor audit quality) is associated with peer review findings.
    • Examine the relationship between peer-review findings and the presence of audit-firm attributes indicative of audit-firm risk and/or lower audit quality.
    Design/Method/ Approach:

    Data is collected from the proprietary files of an insurance company specializing in professional liability coverage for local and regional accounting firms. The authors identify 79 malpractice claims (low audit quality) and 79 non-claim observations (high audit quality) from 1987-2000 and associate peer-review variables and audit-firm characteristics to the presence or absence of malpractice claims.

    Findings:
    •  There is a predictable link between the number of weaknesses identified in an audit firm’s peer-review report and the likelihood of that firm having a malpractice claim filed against it. 
    • The type of weaknesses identified in the report, namely weaknesses related to personnel management and engagement performance, are relevant to predicting audit failure. 
    • There is a predictable link between firm-specific indicators of risk/quality and the likelihood of that firm having a malpractice claim filed against it. 
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Impact of Firm & External Inspection Programs
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