Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    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 
    107 Views
    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