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  • Jennifer M Mueller-Phillips
    The Association between Audit-Partner Quality and Engagement...
    research summary posted May 31, 2016 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.02 Engagement Quality Review – Processes and Effectiveness, 15.0 International Matters, 15.01 Audit Partner Identification by Name in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Association between Audit-Partner Quality and Engagement Quality: Evidence from Financial Report Misstatements
    Practical Implications:

     This study provides useful insights into how audit-partner quality affects engagement-level quality and underscores the importance of audit-partner identification; furthermore, this study could lead to future research which can explore whether audit-partner quality affects the cost of equity and debt capital above and beyond audit-firm and audit-client characteristics with the hopes of deepening the understanding of auditor performance and the market perception of auditor reputation at the audit-partner level.

    Citation:

    Wang, Yanyan, Lisheng Yu, and Yuping Zhao. 2015. The Association between Audit-Partner Quality and Engagement Quality: Evidence from Financial Report Misstatements. Auditing: A Journal of Practice and Theory 34 (3): 81-111.

    Keywords:
    Audit-partner quality, audit failure rate, audit quality control, restatements
    Purpose of the Study:

    This paper attempts to address two specific research questions in this paper:

     

    • Does audit-partner quality affect engagement-level audit quality?
    • How do engagement-team-level and audit-firm-level quality reviews moderate the influence of audit-partner on engagement-level quality?

    Most of the research that has been done on this subject focuses on firm-level or office-level audit quality; however, it is the opinion of the authors that both firm-level and office-level audit quality is driven by the quality of the engagements supervised by individual audit partners.  As a result, the authors decided to investigate just how integral of a role audit partners actually play in the engagement quality equation.  This research is especially interesting for the following reasons:

     

    • The complex nature of auditing implies that it is a judgment and decision-making process which is heavily affected by the characteristics of the person making the decisions.
    • Some insight will be shared on the current debate regarding mandatory disclosure of the engagement partner in the audit report.
    Design/Method/ Approach:

               The authors collected their evidence by merging data from the following sources for the period 2004-2009:

     

    • All available firm-year observations from the China Stock Market and Accounting Research database (CSMAR), which included financial and stock market data, audit opinions, and names of audit firms
    • All identities of the signing audit partners, obtained from CSMAR
    • All restatement announcements collected from annual report disclosures
    Findings:
    • The authors find that the probability of future restatements is higher for annual reports audited by audit partners with higher past-audit failure rates.
    • The authors find that engagement partners who actually conduct the audit have significantly greater influence on future restatement probability than review partners
    • The authors find that clients audited by high-quality audit firms are less likely to restate; however, older firms and firms with higher book-to-market ratio are more likely to restate current year annual reports.
    • The authors find that audit-firm-level quality control slightly attenuates the influence of review partners, but no quality control effectively weakens the influence of engagement partners.  Given that engagement partners play much more of a ro0le in the audit than the review partners, the findings fail to substantiate the mitigating effects of quality control.
    • The authors find that economic incentives amplify engagement partner’s influence on audit quality.
    Category:
    Audit Quality & Quality Control, International Matters
    Sub-category:
    Audit Partner Identification by Name, Engagement Quality Review – Processes & Effectiveness
  • Jennifer M Mueller-Phillips
    An Analysis of SEC and PCAOB Enforcement Actions against...
    research summary posted March 9, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.02 Engagement Quality Review – Processes and Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    An Analysis of SEC and PCAOB Enforcement Actions against Engagement Quality Reviewers
    Practical Implications:

    The findings of this study:

    • “Provides important implications for practitioners and regulators, and areas for future research for those interested in engagement quality review.” (Summary Page)
    • "Shows that EQRs have been sanctioned due to violations of GAAP and GAAS; and that the violations of GAAS involved a lack of due professional care and failure to gather sufficient competent evidence. The analysis of the lack of due professional care showed that EQRs lacked professional skepticism, over-relied on management representations, and abused materiality. Too often, the EQRs were aware of audit quality problems and did little or nothing to correct them.” (pp 16-17).

    For more information on this study, please contact William F. Messier, Jr.

    Citation:

    William F. Messier Jr., Thomas M. Kozloski, and Natalia Kochetova-Kozloski (2010) An Analysis of SEC and PCAOB Enforcement Actions against Engagement Quality Reviewers. AUDITING: A Journal of Practice & Theory: November 2010, Vol. 29, No. 2, pp. 233-252.

    Keywords:
    Engagement quality review, SEC Enforcement Actions, and PCAOB Disciplinary Proceedings, Due professional care, Professional skepticism
    Purpose of the Study:

    “Engagement quality review is an integral part of the audit process. It is designed to be a quality control mechanism for assessing the quality of an audit engagement. Since the 1990s, the SEC has increased sanctions against partners serving as engagement quality reviewers. Recently, the PCAOB issued an auditing standard on engagement quality review as required by Section 103 of the Sarbanes-Oxley Act of 2002. This practice note reports on an analysis of SEC and PCAOB enforcement actions against engagement quality reviewers (EQRs). (Summary Page)”  

    Design/Method/ Approach:

    The authors have identified 28 cases since 1993 that involve some type of sanction against an EQR. They have performed three sets of coding for the 28 cases. The data for the 28 cases used in this study were gathered as follows: (1) AAERs identified by Epps and Messier (2007), (2) three graduate student groups at one US university completed a class project where they reviewed the SEC and PCAOB web sites for selected EQR cases, (3) a research assistant checked each student groups’ cases and also performed additional keyword searches of the SEC web site, and (4) two of the researchers performed keyword searches on the SEC web site and identified DPs from the PCAOB’s enforcement web site.

    Findings:

    The results of this study show the following (of the 28 cases):

    • Only eight cases involved the Big 4/5 public accounting firms.
    • All of the 28 cases involved sanctions due to violations of GAAS and 75 percent contained GAAP violations.
    • Twenty-three cases identified GAAS violations related to a lack of due professional care. Further analysis of those cases showed that the EQR demonstrated a lack of professional skepticism in 22 cases, over-relied on management representations in 20 cases, and ignored materiality concerns in 5 cases.
    • About half of the 28 cases resulted in the EQR being denied the privilege of practicing before the SEC or PCAOB for 3 or more years.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Engagement Quality Review – Processes & Effectiveness
  • Jennifer M Mueller-Phillips
    Review Partners and Engagement Partners: The Interaction...
    research summary posted February 17, 2015 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 11.02 Engagement Quality Review – Processes and Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Review Partners and Engagement Partners: The Interaction Process in Engagement Quality Review
    Practical Implications:

    The most efficient and effective resolution of issues arising from engagement quality reviews is direct interaction between the engagement partner and the engagement quality review partner. When both parties go into the interaction with an open mind it can lead to new and innovative solutions. The involvement of other individuals in the firm does not facilitate or expedite the process of resolution. An important takeaway from the results of this questionnaire was that while the respondents indicated that almost half of the examples involved issues that had arisen in previous years, only a small minority of those same issues were considered to have potential ramifications for future years. This lack of symmetry suggests that the temporal connection of the identified issues was underestimated and suggests that this temporal connection is an important factor that should be explicitly considered in engagement quality reviews.

    For more information on this study, please contact please contact Craig Emby.

    Citation:

    Emby, C. and M. Favere-Marchesi. 2010. Review partners and engagement partners: The interaction process in engagement quality review. Auditing: A Journal of Practice and Theory 29 (2): 215-232.

    Keywords:
    Engagement quality review, Audit Quality
    Purpose of the Study:

    The Engagement Quality Review process is extremely important in ensuring audit quality. Engagement quality review is required by the auditing standards in Canada and the United States. It involves interaction between the engagement quality review partner and the audit engagement partner. This study examined the interaction in this process from the perspective of the engagement quality review partner. The questionnaire asked the participating partners to recall a recent engagement quality review that they had undertaken and to respond to the questions and statements based on their experiences in that engagement quality review. The results provide a comprehensive picture of a typical engagement quality review; the issues involved, the process, and the outcomes that may result. In general, the partners showed a high level of agreement, and insight into the process, and their role in that process. Taken together, the results describe a professional, collegial, non-adversarial process, primarily focused on the objective of resolving difficult and complex client accounting issues.

    Design/Method/ Approach:

    A questionnaire, divided into three parts – issue, process, and outcome – was completed by audit partners in large international public accounting firms, experienced in performing engagement quality reviews. The responses were collected during the period 2008-2009. 

    Findings:

    Issue(s)

    • The majority of reviewing partners identified the complexity of the accounting issue(s) as the most salient aspect of the engagement quality review.
    • A much smaller number of reviewing partners identified auditing issues as the most salient aspect of the engagement quality review.

    Process

    • In the vast majority of instances, the resolution of the issue(s), was accomplished by direct interaction between the engagement quality review partner and the engagement partner, with no other parties involved
    • The resolution of auditing issues was much less frequently mentioned as the most important part of the process.

    Outcome(s)

    • In all instances the issue(s) was/were satisfactorily resolved and an unqualified audit report was issued.
    • In a plurality of instances, the resolution was neither the engagement partner’s initial position, nor the review partner’s initial position, nor a compromise between the two, but agreement on a new solution generated by the discussion between the engagement partner and the review partner.
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Engagement Quality Review – Processes & Effectiveness
  • Jennifer M Mueller-Phillips
    Firm versus Partner Measure of Auditor Industry Expertise...
    research summary posted October 10, 2013 by Jennifer M Mueller-Phillips, tagged 11.01 Supervision and Review – Effectiveness, 11.02 Engagement Quality Review – Processes and Effectiveness, 11.04 Industry Experience, 11.07 Attempts to Measure Audit Quality, 11.08 Proxies for Audit Quality in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Firm versus Partner Measure of Auditor Industry Expertise and Effects on Auditor Quality
    Practical Implications:

    The findings of this study imply that firm level expertise impacts audit quality but has a greater impact in conjunction with office level or partner level expertise. Similarly, concurring auditors have a greater impact on audit quality when their abilities are paired with those of a lead or signing partner. This study implicitly emphasizes the importance in cooperation and the sharing of intellectual resources among partners in Big 4 firms considering that expertise is not homogeneous across a firm. Additionally, this study has implications on what could result if the Public Company Accounting Oversight Board in the United States decided to require an engagement partner’s signature on the audit report.

    For more information on this study, please contact Hsin-Yi Chi.
     

    Citation:

    Chi, H., and C. Chin. Firm versus partner measures of auditor industry expertise and effects on auditor quality.  Accounting: A Journal of Practice and Theory 30 (2): 201-229.

    Keywords:
    individual partner industry expertise; discretionary accruals; modified audit opinion; audit quality.
    Purpose of the Study:

    This study explores the relationship between Big 4 audit quality and auditor expertise with respect to both the individual partners and the audit firm. The authors used accruals analysis as well as analysis of audit opinions to assess audit quality. To take the study a step further, an examination of the possible existence of differential audit quality between signing auditors whether lead or concurring partners was also performed. An office level perspective was used and deemed appropriate under the assumption that auditor expertise is permanently tied to individual professionals and their client knowledge which cannot be readily captured and distributed across the firm offices; additionally, the individual practice office is the decision-making unit of the firm when it comes to specific clients.

    To accomplish their purpose, first the authors studied whether audit industry expertise is driven by firm expertise, individual partner expertise, or a combination of both. They also studied whether the association between audit quality and industry expertise of the signing auditor specialist was more or less prominent for the lead auditor or the concurring auditor. One would expect that the lead partner generally would exhibit a more prominent association with audit quality than concurring audit specialists because it is the lead partner who is actively engaged with daily audit proceedings; this study aims to discover if that is truly the case. The study assesses the effectiveness of an individual partner-level and firm-level auditor specialists in enhancing audit quality as well as provides evidence regarding industry expertise homogeneity between individual partners within the same firm.  
     

    Design/Method/ Approach:

    The evidence for this study was collected from Taiwanese publicly listed companies audited by the Big 4 firms from 1983 to 2004. Financial data, audit opinions data, and auditor names were obtained from the Taiwan Economic Journal. Taiwan was the chosen location for this evidence because the audit report in Taiwan contains two signing auditor names as well as the firm name. 

    Findings:
    • Both firm-level industry expertise alone and partner- level industry expertise alone are associated with lower accruals. However, a combination of the two creates an effect above and beyond either level of expertise in isolation; therefore, differential discretionary accruals due to industry expertise are driven by a combination of firm and partner expertise.
    • Differential accruals due to industry expertise of signing are primarily driven by the lead auditor rather than the concurring auditor.
    • The differential likelihood of the issuance of a modified audit opinion is primarily attributable to signing auditor specialists and partner-level expertise.
    • Firm level specialists alone are not associated with a higher likelihood of issuing a modified audit opinion. Instead, firm level specialists along with signing auditor specialists create effects above and beyond those observed with auditor specialists alone.
    • Clients of lead signing auditor specialists have smaller accruals and are more likely to receive a modified audit opinion relative to those of non-specialists  whether the auditor specialists works alone or with a concurring auditor specialist.
    • Concurring auditor specialists alone are not associated with higher audit quality.
    • Industry expertise is not homogeneous across individual auditors within the same audit firm in Taiwan.
       
    Category:
    Audit Quality & Quality Control
    Sub-category:
    Attempts to Measure Audit Quality, Engagement Quality Review – Processes & Effectiveness, Industry Experience, Proxies for Audit Quality, Supervision & Review – Effectiveness
  • The Auditing Section
    Risk Monitoring and Control in Audit Firms: A Research...
    research summary posted April 16, 2012 by The Auditing Section, tagged 02.0 Client Acceptance and Continuance, 02.02 Client Risk Assessment, 11.0 Audit Quality and Quality Control, 11.02 Engagement Quality Review – Processes and Effectiveness, 11.11 Impact of Firm and External Inspection Programs in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Risk Monitoring and Control in Audit Firms: A Research Synthesis
    Practical Implications:

    While research on “quality-threatening behaviors” by auditors is difficult to perform due to confidentiality constraints, the available findings suggest that audit firms can make a difference in their incidence and severity through careful attention to policies and procedures for assessing, monitoring and controlling risk of violation of professional standards. While there is likely to be greater resistance to higher quality control standards among smaller firms, research shows that audit quality concerns are greater for smaller firms and that larger firms are currently passing smaller and riskier clients to them. The authors suggest that small accounting firms can adopt strategies, like creating alliances or becoming niche providers of certain audit services, to allow them to meet this challenge.

    Citation:

    Bedard, J.C., D.R. Deis, M.B. Curtis, and J.G. Jenkins. 2008. Risk monitoring and control in audit firms: A research synthesis. Auditing: A Journal of Practice & Theory 27 (1): 187-218.

    Keywords:
    Audit firm quality control, risk monitoring, auditing standards, independence risk, whistle-blowing, decision aids
    Purpose of the Study:

    Audit firm quality control is defined as an audit firm’s assessment and control of the risk that auditing standards, professional values or the public interest might be violated. The PCAOB has recently expressed interest in understanding the current status of research related to audit firm quality control as it considers revising the current standards in this area. This paper summarizes the research literature related to audit firm quality control with the following two objectives: (1) to provide information on the current state of knowledge with regard to the ways in which audit firms monitor and control firm-level risk; and (2) to highlight implications for development of new standards and for future research.

    Design/Method/ Approach:

    This paper reviews the literature related to audit firm quality control. Evidence was collected prior to 2006 with much of the data gathered prior to SOX and the founding of the PCAOB.

    Findings:

    Risk Management before the Engagement:

    • Recent research suggests that larger firms are shedding smaller, riskier clients to smaller audit firms as a result of the Andersen demise and Section 404 work. Further, smaller clients often choose smaller firms on the basis of more affordable fees. These findings suggest that client portfolio risk has recently increased among smaller firms.
    • Studies find that audit firms appear to be willing to take on riskier clients if the billing rate allows increased testing and/or assignment of more highly qualified engagement personnel (e.g., specialists). However, smaller audit firms may be less able to price engagement bids to cover increased exposure from riskier clients. 

    Monitoring and Control of Auditor Independence Risk:

    • Audit Firm and Partner Rotation: The archival studies report mixed results on the effect of firm and partner rotation on auditor independence. However, behavioral research provides evidence in support of firm or partner rotation. Behavioral studies generally find that auditors’ tend to make decisions in favor of management’s position and that proposed adjustments are typically smaller when rotation is not required.
    • Employing Former Auditors: Research suggests that the practice of companies employing former auditors is widespread. There is also some evidence of independence impairment and a loss of professional skepticism associated with this practice.
    • Auditor-Provided Nonaudit Services: While results are somewhat mixed, the balance of research does not appear to support the conclusion that auditor independence is compromised by the provision of nonaudit services. 

    Risk Management during the Engagement

    • Electronic Decision Aids: Research shows continuing growth and development of electronic decision aids in audit firms. Potential benefits of auditing decision aids include increased compliance with auditing standards and audit methodology, increased audit efficiency, consistency in audit approaches across clients, easier documentation, and increased control of junior staff.
    • Consultation Units: Accounting firms can control risk by developing specialized internal groups to assist local offices in making decisions. Creating a database of research increases efficiency and improves the consistency of accounting treatments recommended to clients. However, research suggests that the use of consultation units is inconsistent across the profession and declines significantly with firm size.
    • Whistle-Blower Mechanisms: Research suggests that the presence of whistle-blower mechanisms increases the likelihood that reports of wrong-doing will be made. The effectiveness of these programs is enhanced when (1) confidentiality is ensured; (2) employees thoroughly understand the mechanism; and (3) when firms both encourage such reporting and discourage retribution for reporting unethical acts. 

    Internal and External Inspections and Review

    • Internal Engagement Quality Control Reviews: Research indicates that engagement quality control reviews reduce audit risk by improving audit risk assessments and inducing partners to plan higher levels of audit testing.
    • Peer Reviews: Participation in a quality peer review process represents a commitment to quality by the audit firm. In fact, research provides evidence that audit firms participating in a peer review process conduct higher quality audits, and continued participation leads to continued improvements in audit quality over time.
    • Regulatory Quality Control Reviews and Inspections: Overall, a positive link has been found between quality control reviews and audit quality.
    Category:
    Client Acceptance and Continuance, Audit Quality & Quality Control
    Sub-category:
    Client Risk Assessment, Engagement Quality Review – Processes & Effectiveness, Impact of Firm & External Inspection Programs
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  • The Auditing Section
    Engagement Quality Reviews: A Comparison of Audit Firm...
    research summary posted April 16, 2012 by The Auditing Section, tagged 05.0 Audit Team Composition, 05.06 Qualifications of Engagement Quality Reviewers, 11.0 Audit Quality and Quality Control, 11.02 Engagement Quality Review – Processes and Effectiveness in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Engagement Quality Reviews: A Comparison of Audit Firm Practices
    Practical Implications:

    Engagement quality review is one quality control mechanism used by public accounting firms to monitor the quality of audit engagements. In this study, the authors analyzed the concurring partner review process by reviewing six firms’ concurring partner review guidance. The authors argue that the analysis of this study provides a base for the PCAOB in setting its standard for engagement quality review.

    Citation:

    Epps, Kathryn K.and W.F. Messier, Jr. 2007. Engagement Quality Reviews: A Comparison of Audit Firm Practices. Auditing: A Journal of Practice & Theory 26 (2): 167-181.

    Keywords:
    Concurring partner review, engagement quality review.
    Purpose of the Study:

    Engagement quality (EQ) review, formerly called concurring partner review, is an important part of the audit review process. It is one quality control mechanism used by public accounting firms to monitor the quality of audit engagements. Concerns about the effectiveness of existing firm EQ review practices have led to increased partner sanctions by the SEC. In addition, SOX directs the PCAOB to develop an auditing standard on engagement quality review. Due to the structure of the current requirements, the authors note that there is the possibility for some variation for the concurring partner review and subsequent documentation across firms. In this study, the authors have two primary objectives: 

    • To determine the consistency of concurring partner (engagement quality) guidance included in the auditing manuals of the major public accounting firms. 
    • To conduct a task analysis of engagement quality reviews in order to develop research questions for future investigations.
    Design/Method/ Approach:

    The authors requested (in 1999) and subsequently collected firm guidance from the Big 4 and two of the next three largest U.S. firms specifically related to their engagement quality review process and documentation.  The data was provided by partners with “senior positions” at each firm as well as extensive experience with concurring reviews. Once the firm guidance was received (in roughly 2002), it was coded by attributes then returned to the firm for a review of the coding. Then each firm was asked to have an experienced concurring partner complete a short questionnaire that requested additional information or clarifying questions.

    Findings:
    • The results show a moderate level of consistency across the firms in regards to their policies surrounding engagement quality reviews. 
    • Differences identified among firms relate to:
      • The assignment of concurring partners to audit engagements.
      • The participation of the concurring partner in audit planning.
      • The content and extensiveness of practice aids available to concurring partners.
      • The involvement of concurring partners during the course of the audit engagement.
    • The authors find that the firms surveyed comply with the existing required regulation in all cases.  However, it was noted that some firms require practices above and beyond the current standards. 
    Category:
    Audit Team Composition, Audit Quality & Quality Control
    Sub-category:
    Qualifications of Engagement Quality Reviewers, Engagement Quality Review – Processes & Effectiveness
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