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    Auditor Standard Setting and Inspection for U.S. Public...
    research summary posted April 13, 2012 by The Auditing Section, last edited May 25, 2012, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 01.06 Impact of PCAOB 
    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.

    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.

    auditing standards, PCAOB
    Purpose of the Study:

    The purpose of this study is to provide commentary on the PCAOB’s ability to achieve its mission given its standard-setting and inspection models, incentives, organizational composition, and structure. The authors also provide recommendations to policy makers, regulators and leaders in the accounting and audit profession in developing improved approaches to audit standard-setting, inspection and enforcement.

    Design/Method/ Approach:

    This paper is structured as a commentary organized under the following sections: auditing standards, inspection and enforcement, and recommendations to improve standard-setting and inspection.


    As this paper is a commentary, there are no findings.  The summary of discussion points is included below.

    Standard Setting
    Impact of SOX, Impact of PCAOB
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