Search results

Setting audit fees is a persistent source of stress for auditors who must, on one hand, comply with the increasing government regulations that generally cause costs to rise; and on the other hand, respond to client pressures to keep audit fees down. In the post-scandal environment of Enron, WorldCom, and the demise of Arthur Andersen, policy makers have introduced additional costs for auditors by increasing regulations and creating a new industry watchdog – the Public Company Accounting Oversight Board (PCAOB). In this environment of constant pricing-cost tension for the auditor, the purpose of this paper is to examine audit fee trends over an extended period, 2000-2014.

The authors calculate the unexpected audit fees using the audit fee model. The authors examine audit fee trends while controlling for changes due to inflation, auditor wages, and other audit fee determinants.

The key findings indicate that audit fees increased in response to the promulgation of new audit regulations requiring additional audit work, the Sarbanes-Oxley (SOX) Act of 2002 and Auditing Standard No. 2 in 2004. Additionally, the authors find that audit fees decreased after new regulations alleviating audit work, namely the passage of Auditing Standard No. 5 in 2007, and remained unchanged when new regulations had a minimal impact on audit work, namely the Dodd-Frank Act of 2010.

The findings of this research are relevant to audit clients, auditors, and regulators as they weigh the cost and benefits of significant new audit regulations and their impacts on audit fees.

Using the more recent US data, the results in this paper show how events changed audit fee trends in recent years. The findings indicate that audit fees increased after the passage of new audit regulations such as the SOX Act of 2002, Auditing Standards No. 2 in 2004, and decreased after the passage of Auditing Standards No. 5 in 2007.

In 1954, the American Institute of Certified Public Accountants (AICPA) Committee on Accounting Procedure released an auditing book, which listed under the heading “Material” certain items of which it cautioned “material errors” could occur (AICPA, 1954, p. 1). From this date until the present, the accounting profession has struggled in its endeavors to find both a suitable definition and associated guidance to determine the materiality of information provided to financial statement users. Accordingly, in September 2015, the Financial Accounting Standards Board (FASB) issued two exposure drafts that address the concept and interpretation (our emphasis) of materiality. The releases are Proposed Amendments to Statement of Financial Accounting Concepts, Conceptual Framework for Financial Reporting; Chapter 3: Qualitative Characteristics of Useful Financial Information (Financial Accounting Standards Board (FASB), 2015a) and Proposed Accounting Standards Update, Notes to Financial Statements (Topic 235) Assessing Whether Disclosures Are Material (FASB, 2015b). In this article, the authors focus on the Chapter 3 amendments (FASB, 2015a), which proposes a new definition whose genesis is based on the US Supreme Court definition of the concept. Accordingly, the authors examined the views of two stakeholders in the US financial reporting system, auditors in large public accounting firms, and Chief Financial Officers of the Fortune 1000 companies, regarding their perceptions of the proposed definition. The authors developed the research instrument to evaluate their perceptions of the proposed definition’s potential impact on various aspects of the audit and financial reports. The authors found that both populations have negative perceptions of the materiality definition in the exposure draft and an interpretation of the responses did not indicate an addition of any benefits from its adoption. Subsequent to our solicitation for our subjects’ opinions, the FASB voted unanimously in November 2017 to remove the reference to materiality as a legal concept (FASB, 2017) and in August 2018 (FASB, 2018) amended FASB Concept Statement No. 8 to replace the materiality definition with language similar to the previously superseded FASB Concept Statement No. 2. However, as the authors will explain in this article, the fact that three authoritative definitions exist, which continue to present problems for financial statement preparers and auditors. In this analysis, the authors find evidence that auditors and investors continue to see a significant difference between the terminology of “users” and “reasonable resource provider” within the various materiality definitions.

Outlines economic and accounting reforms in China since the late 1970s and assesses the impact of the 1997 Asian financial crisis on them. Suggests that although China escaped the recession suffered by neighbouring countries, it still has a high risk of financial crisis/recession and enumerates the reasons why. Explains the steps taken by the government to reduce the risk, including reforms aimed at the standardization of accounting practices and improved reliability and comparability of financial information. Discusses the nine practical accounting standards issued between May 1997 and July 1999, which are in line with international standards and summarizes the reforms to enhance the independent status of public practitioners and the auditing standards issued so far. Identifies six remaining problems in the process of accounting reform but believes it is on the right track.

For the past 10 years, the Public Company Accounting Oversight Board (PCAOB) has operated as an independent overseer of public company audits. Over 70 percent of PCAOB studies have been published since 2010, evidencing the increasing relevance of PCAOB-related research in recent years. Our paper reviews the existing literature on the PCAOB’s four primary functions – registration, standard-setting, inspections, and enforcement. In particular, we examine PCAOB registration trends and evaluate the effects of PCAOB registration requirements on the issuer audit market, as well as discuss the relative costs and benefits (e.g., auditor behavior changes, improvements in audit quality, auditor perceptions) of the 16 auditing standards the PCAOB passed in its first 10 years of operation. Further, we summarize the literature’s findings on the effects of the PCAOB inspection process on various facets of audit quality. Finally, we analyze the research concerning the PCAOB’s enforcement actions to determine how markets have responded to sanctions against auditors and audit firms. We contend that understanding and reviewing the effects of the PCAOB’s activities are important to future audit research because of the PCAOB’s authority over and oversight of the issuer audit profession. We also identify PCAOB-related research areas that have not been fully explored and propose several research questions intended to address these research areas.

The purpose of this paper is to estimate the cost of the internal control audit for small firms and assess whether the costs are scalable or, alternatively, whether they are higher in relation to firm size for small firms than for larger firms.

The method estimates the Section 404 audit fee premium for companies that became accelerated filers for the first time in 2006 and 2007. The authors use the estimated audit fee premium as a proxy for the premium that non‐accelerated filers would have to pay if they were required to obtain an internal control audit.

The main finding shows that the Section 404(b) estimated cost of the internal control audit divided by assets are significantly higher for non‐accelerated filers and first‐time filers than for those of larger firms.

One limitation of the study is that, while it shows that the costs of the Section 404 audit are not scalable to firm size, it does not prove that the costs of the audit exceed the benefits for non‐accelerated filers.

The finding that the costs are proportionately higher for small firms provides some evidence supporting the decision to permanently exempt non‐accelerated filers from Section 404(b).

The results show that smaller firms pay proportionately more for the Section 404 internal control audit than larger firms. This suggests that the revised AS no. 5 did not succeed in making the internal control audit completely scalable to firm size.

This study’s purpose is to examine whether providing prior consulting services influences internal auditors’ subsequent assessments when providing assurance services to assist management in its assessment of internal control over financial reporting. A behavioral experiment is used, with internal auditors as participants. We provide some evidence that internal auditors who perform prior consulting services are less likely than others to conclude that an identified control deficiency is a material weakness, but only when the deficiency is directly related to the prior consulting services performed. Limitations include relatively small sample sizes and manipulation check failure rates that, although consistent with several prior studies, are somewhat high. If internal auditors have provided consulting services, they may want to consider limiting the assurance services provided to management that are more directly related to their consulting services. While prior studies have examined the effects of internal auditors’ role in designing internal controls on subsequent services, this is the first study to focus on the impact of providing internal audit consulting services on subsequent assurance services.

Section 404 of the Sarbanes–Oxley Act (SOX) altered the relationship between auditors and their clients by requiring an external audit of companies’ internal controls. Regulatory guidance is interpreted and applied by external auditors to comply with SOX. The purpose of this paper is to apply service operations management theories and techniques to the internal control audit process to better understand the role regulatory guidance plays in audit services. We discuss service operations management theories that apply to the production of audit services and employ the operations management technique of simulation to examine the effects of a historical relationship between the client and the auditor, information sharing between the client and the auditor, and the auditor’s perceived risk of the client on the internal control audit process. The application of service operations management theories and the simulation results illustrate that risk and information sharing are key factors for the audit process. The results suggest the updated Public Company Accounting Oversight Board guidance from Auditing Standard 2 to Auditing Standard 5 appropriately increased audit effectiveness by encouraging risk-based judgments and information sharing. This paper merges accounting and service operations management research to examine the effects of regulatory guidance on the internal control audit process. The paper uses simulation to illustrate the importance of interpreting regulatory guidance and the specific effects of risk and information sharing on the internal control audit process.

This paper aims to explore the potential effect of key audit matters (KAM) on the audit report lag (ARL). In particular, it aims to discover whether the number of KAMs reported by an audit firm in Jordan is related to the length of its ARL.

The authors analysed data from the first three years of KAM reporting in Jordan (2017–2019) for 194 public listed Jordanian companies to examine the relation between the number of KAMs and the ARL, taking into account several control variables related to the Jordanian context.

This study found that there is no statistically significant relation between the number of KAMs reported by Jordanian audit firms and their ARLs, suggesting that the KAM reporting in Jordan is somewhat superficial, with the selection of what is actually reported as a KAM not directly related to the efforts needed to deal with its concerns. However, this study also found statistically significant positive relations between the ARL and each of audit fees, audit firm size, the issuance of a qualified audit opinion and company leverage and a statistically significant negative relation between the ARL and company profitability.

This is one of the very few studies to cover the potential relation between KAM reporting and the ARL. In a developing country context characterised by limited demand for an external audit of high quality, this study finds that auditors may decouple on their reporting of KAMs by not actually making significant efforts to deal with them.

With Sarbanes–Oxley Act of 2002 (SOX), the self-regulation of the auditing profession was replaced with standard setting and oversight by the government. The authors focus on the audit fees literature to examine how this change impacted research trends over time and shaped different aspects of audits.

The authors utilized bibliometric and content analysis to identify research themes pre- and post-SOX.

The change in regulation contributed to an increased focus on clients and continued interest in engagement characteristics as added requirements emphasized the client's governance structure, the auditor's tenure and the type of services provided.

The prominent issue that emerged is how deficiencies in the audit processes and in the client's internal controls are translated into audit fees. The authors discuss regulatory initiatives pursued in other jurisdictions, including mandatory rotation of firms, joint audits and further limitations on non-audit services, as intended and unintended consequences of these requirements warrant further examination.

We investigate the effect of the PCAOB’s Part II report on annually inspected firms’ audit fees and audit quality. The PCAOB replaced the peer review auditor program with an independent inspection of audit firms. Upon completion of each inspection, the PCAOB issued inspection reports that include a public portion (Part I) of identified audit deficiencies, and (in most cases) a nonpublic portion (Part II) of identified quality control weaknesses. The Part II report is only made public when the PCAOB deems that remediation was insuffcient after at least 12 months have passed. Starting around the time of the 2007 Deloitte censure (Boone et al., 2015), the PCAOB shifted from a soft synergistic approach to an antagonistic approach, such that Part II reports were imminent, despite delays that ultimately led to their release one to four years later than expected. Our study spans the period from 2007 to 2015, and examines the effect on audit fees and audit quality at the earliest date that the Part II report could have been released – 12 months after the Part I report was issued. We find that following the 12 month period, that annually inspected audit firms eventually lost reputation by lower audit fees, while they concurrently made remedial efforts to increase the quality of their client’s financial reporting quality (abnormal accruals magnitude and restatements). However, three years after the Part II report was actually released, audit fees increased.