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    The Impact of PCAOB Auditing Standard No. 5 on Audit Fees...
    research summary posted October 3, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 07.0 Internal Control, 07.05 Impact of 404 on Fees and Financial Reporting Quality 
    The Impact of PCAOB Auditing Standard No. 5 on Audit Fees and Audit Quality
    Practical Implications:

    This study provides an analysis of the effect of PCAOB Auditing Standard No. 5 (AS5) on internal control audit efficiency. The authors interpret their results as indicating that AS5 improved internal control audit efficiency by reducing audit fees without harming audit quality. The results of this study provide insight into the consequences of PCAOB standard setting, which is of interest to standard setters and businesses subject to their rules.

    For more information on this study, please contact Dechun Wang.


    Wang, D. and J. Zhou. 2012. The Impact of PCAOB Auditing Standard No. 5 on Audit Fees and Audit Quality. Accounting Horizons 26 (3): 493-511.

    PCAOB Auditing Standard No. 5, audit fee, audit quality, internal control.
    Purpose of the Study:

    Due to strong complaints to the SEC and PCAOB about high audit costs associated with PCAOB Auditing Standard No. 2 (AS2) which governed internal controls audits, the PCAOB amended AS2 and proposed Auditing Standard No. 5 (AS5) in 2007. AS5 was aimed at reducing unnecessary costs and providing a more efficient audit of internal controls. It provides auditors a “top-down, risk-based” approach which allows them to tailor the audit to client size, complexity and specific critical risk areas. Furthermore, it provides auditors more flexibility in relying on the work of management and internal auditors.
        This study’s aim is to understand whether the PCAOB has accomplished its goal of making internal audits more efficient. The authors make a point to say that this requires not only audit fee reduction but also no drop in audit quality. The authors make and test the following hypotheses:

    H1: Audit fees are significantly lower after the adoption of AS5 for accelerated filers, but not non-accelerated filers (Note: AS5 does not apply to non-accelerated filers because the requirement of an audit of internal controls for these firms was initially deferred and eventually exempted by the Dodd-Frank Act of 2010)

    H2: Ceterus Paribus, audit quality does not change after the adoption of AS5

    Design/Method/ Approach:

    The authors utilize data on public companies around the 2007 implementation of AS5. They classify accelerated filers that had FYEs between November 15, 2007 (the AS5 implementation date) and November 14, 2008 as AS5 firms. They compare changes in audit fees for these firms to changes in audit fees in the previous year. They then compare changes in audit fees for AS5 firms to changes in audit fees for firms not subject to AS5 during the same period (non-accelerated filers). Finally they compare audit quality for AS5 firms in the year after AS5 implementation to the year immediately preceding AS5 implementation.

    • The authors provide evidence of a decrease in audit fees for the AS5 sample while audit fees increased for the pre-AS5 sample and the contemporaneous non-accelerated filing sample. 
    • The authors do not find a significant change in audit quality for the AS5 sample. This failure to find a significant result is robust to different measures of audit quality (Abnormal accruals, meeting or beating earnings forecasts and the probability of issuing an internal control weakness opinion).

    Taken together, the authors claim that these results are indicative of AS5 providing more efficient audits of internal controls. They argue that this result is confirmation that AS5 has accomplished the PCAOB’s objective of providing the same benefits of Sarbanes Oxley at a more reasonable cost to companies.

    Internal Control, Standard Setting
    Changes in Audit Standards, Impact of 404 on Fees and Financial Reporting Quality