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Book part

Jacqueline A. Burke and Hakyin Lee

Mandatory auditor firm rotation (mandatory rotation) has been a controversial issue in the United States for many decades. Mandatory rotation has been considered at…

Abstract

Mandatory auditor firm rotation (mandatory rotation) has been a controversial issue in the United States for many decades. Mandatory rotation has been considered at various times as a means of improving auditor independence. For example, in the United States, the Public Company Accounting Oversight Board (PCAOB) has considered mandatory rotation as a solution to the independence problem (PCAOB, 2011) and the European Parliament approved legislation that will require mandatory rotation in the near future (Council of European Union, 2014). The concept of implementing a mandatory rotation policy has been encouraged by some constituents of audited financial statements and rejected by other constituents of audited financial statements. Although there are apparent pros and cons of such a policy, the developmental process of such a policy in this country has not necessarily been an open-democratic, objective process. Universal mandatory rotation may or may not be the ideal solution; however, an open-democratic, objective process is needed to facilitate the development of a solution that considers the needs of all major stakeholders of audited financial statements – not simply accounting firms and public companies, but also investors. The purpose of this paper is to critically examine key issues relating to mandatory rotation and to encourage and stimulate future research and ongoing dialogue regarding this issue, in spite of efforts by certain constituents to silence the issue. This paper provides an overview of the various reasons, including practical, theoretical, political, and self-motivated reasons, why a mandatory rotation policy has not been implemented in the United States in order to address the potential conflict of interest between the auditor and client. This paper will also discuss how some deliberations of mandatory rotation have been flawed. The paper concludes with a summary of key issues along with two approaches for regulators, policy makers, and academics to consider as ways to improve the process and address auditor independence. The authors are not advocating for any specific solution; however, we are advocating for a more objective, unified approach and for the dialogue regarding auditor rotation to continue.

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Sustainability and Governance
Type: Book
ISBN: 978-1-78441-654-6

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Article

Henry Huang and H. Gin Chong

This paper aims to analyze Public Companies Accounting Oversight Board (PCAOB) inspection reports on audit reports of those inspected accounting firms in Brazil, Russia…

Abstract

Purpose

This paper aims to analyze Public Companies Accounting Oversight Board (PCAOB) inspection reports on audit reports of those inspected accounting firms in Brazil, Russia, India and China (BRIC). In meeting the requirements of the Sarbanes-Oxley Act, the PCAOB conducts inspections on audit reports of firms listed on the New York Stock Exchange.

Design/methodology/approach

The reports include those submitted by both the US audit parent firms and their secondary firms located outside the USA. In each PCAOB report, it unravels the nature of audit deficiencies. The focus is on Big Four because they play a dominant role in the marketplace and issuers’ market capitalization. All the seven-year deficiencies are documented since publications of the reports from 2004 to 2012.

Findings

Of the 37 reports, 19 (51 per cent) were issued relating to audits conducted by the Big Four. Out of these 19 reports, 10 (53 per cent) contain inspection criticism. These include audit quality and common recurring audit deficiencies.

Research limitations/implications

This paper is based solely on those inspection reports published by the PCAOB.

Practical implications

The findings have significant implications to audit firms and the audit profession on improving audit quality, firms’ internal control and reports.

Originality/value

No known prior research paper is available on the ramifications of the PCAOB’s inspection reports relating to BRIC.

Details

International Journal of Law and Management, vol. 58 no. 2
Type: Research Article
ISSN: 1754-243X

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Article

She-Chih Chiu, Chin-Chen Chien and Hsuan-Chu Lin

The purpose of this paper is to investigate the extent to which the transition from self-regulation to heteronomy has changed the gap in audit quality between Big Four and…

Abstract

Purpose

The purpose of this paper is to investigate the extent to which the transition from self-regulation to heteronomy has changed the gap in audit quality between Big Four and non-Big Four auditors.

Design/methodology/approach

This study analyzes publicly held companies in the USA between 1999 and 2012 using univariate analysis, multivariate analysis and quantile regression analysis. Audit quality is measured with discretionary accruals.

Findings

This study shows an insignificant difference in audit quality between the clients of Big Four and non-Big Four auditors after Public Company Accounting Oversight Board (hereafter, PCAOB) began its operations. In the analysis of the effects of PCAOB inspections on the audit quality of audit firms that are inspected annually and triennially, the findings show that the inspections have more positive effects when carried out annually. This suggests that the frequency of inspection is positively associated with audit quality. Overall, these results provide evidence that recent improvements in audit quality have been caused by changes in regulatory standards.

Originality/value

The paper provides three major original contributions. First, the authors add to the literature on audit quality by further demonstrating a reduced gap in audit quality between Big Four and non-Big Four audit firms due to heteronomy. Secondly, this study contributes to the debate as to whether independent inspections on audit firms are beneficial or not and suggests that the PCAOB inspections help increase audit quality. Finally, the results of this work contribute to the growing literature examining discretionary accruals.

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Corporate Governance: The International Journal of Business in Society, vol. 17 no. 5
Type: Research Article
ISSN: 1472-0701

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Article

Ifeoma Udeh

The purpose of this paper is to examine the effect of the PCAOB part II report disclosures on US triennially inspected audit firms’ deregistration decisions, the…

Abstract

Purpose

The purpose of this paper is to examine the effect of the PCAOB part II report disclosures on US triennially inspected audit firms’ deregistration decisions, the likelihood and the timing of audit firms’ dismissals and resignations.

Design/methodology/approach

The paper anchored on US regulations used 158 publicly available records of disclosed PCAOB part II reports from 2004 to 2012.

Findings

The number of the quality control deficiencies disclosed in the part II report affects US triennially inspected audit firms’ decisions to deregister from the PCAOB. Additionally, audit firms’ dismissals and resignations, both occur mostly within the first year after the part II report disclosure, although audit firms that subsequently deregister are more likely to be dismissed.

Practical implications

The paper provides support that the disclosure of the PCAOB part II inspection report motivates audit quality improvement.

Social implications

The PCAOB inspection and subsequent disclosure of the part II inspection report enhances audit quality, which in turn, enhances investor confidence in the accuracy and reliability of audited financial statements.

Originality/value

The paper provides insights about the effect of the disclosures of PCAOB part II report, over and above any benefits from the PCAOB part I report disclosures, which is the dominant focus of related literature.

Details

Journal of Accounting & Organizational Change, vol. 13 no. 4
Type: Research Article
ISSN: 1832-5912

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Article

Fei Kang, Magdy Farag, Robert Hurt and Cheryl Wyrick

The purpose of this study is to examine the association between certain audit firm characteristics and the number of Public Company Accounting Oversight Board (PCAOB

Abstract

Purpose

The purpose of this study is to examine the association between certain audit firm characteristics and the number of Public Company Accounting Oversight Board (PCAOB)-identified audit deficiencies.

Design/methodology/approach

Using a hand-collected sample of PCAOB inspection reports for small audit firms with 100 or less issuer clients from 2007 through 2010, an ordinary least squares model is applied by regressing the number of deficiencies on a set of audit firm characteristics.

Findings

Results show that the number of PCAOB-identified audit deficiencies is positively associated with the number of issuer clients and negatively associated with the number of branch offices, the human capital leverage and the organization structure as Limited Liability Partnership firms. Additional analysis also shows that the PCAOB inspection length is positively associated with the number of deficiencies, the number of branch offices and the number of issuer clients, but negatively associated with the organization structure as limited liability company firms. Moreover, the PCAOB inspection lag is positively associated with the number of deficiencies and the number of issuer clients.

Research limitations/implications

Results of this study cannot be generalized beyond public accounting firms with 100 or fewer issuer clients. In addition, there is a possibility that other measurements of firm-level characteristics that impact the number of PCAOB-identified audit deficiencies were not captured in the study.

Practical implications

This study explains the association between audit firm characteristics and PCAOB-identified audit deficiencies. Our results caution small audit firms about not having enough professional staff, low human capital leverage and serving too many issuer clients, as those factors may potentially impair audit quality.

Originality/value

This study helps to explain the relationship between audit deficiencies and controllable, measurable firm-level characteristics. It is, therefore, differentiated from previous studies, most of which were focused on PCAOB-identified audit deficiencies as measures of audit quality and stakeholder reactions to PCAOB reports.

Details

Managerial Auditing Journal, vol. 29 no. 8
Type: Research Article
ISSN: 0268-6902

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Article

William Buslepp, R. Jared DeLisle and Lisa Victoravich

Part II of the Public Company Accounting Oversight Board (PCAOB) inspection report is released only when firms fail to remediate quality control criticisms and is intended…

Abstract

Purpose

Part II of the Public Company Accounting Oversight Board (PCAOB) inspection report is released only when firms fail to remediate quality control criticisms and is intended to be a public signal of audit quality. The purpose of this paper is to reexamine whether audit clients react to the release of Part II of the PCAOB inspection report as a signal of audit quality.

Design/methodology/approach

This study uses a difference-in-difference regression model to examine the association between the release of Part II of the PCAOB inspection report and an audit firm’s change in market share. A sensitivity analysis is also performed to determine whether the main findings are robust to the timing of the release of the report and type of quality control criticism included in Part II of the inspection report.

Findings

After controlling for the prior year’s changes in market share, the authors find no evidence that clients react to the public release of Part II of the report. In the second part of the study, they examine when clients become aware of the contents of the Part II report prior to its release. Firms with audit performance criticisms experience a decrease in market share following the release of Part I. Firms with firm management criticisms experience a significant decrease in market share following the remediation period and before the public release of Part II.

Practical implications

The results suggest that Part II of the PCAOB inspection report does not provide new information to the market. Clients appear to be aware of the information contained in Part II of the PCAOB inspection report prior to its release. The authors believe that the delay in releasing the Part II report may create an information imbalance, and the PCAOB may want to consider ways to improve the timeliness of the information.

Originality/value

This study questions the generalizability of prior research which finds that Part II of the inspection report provides new information that is valued by the public company audit market as a signal of audit quality. The findings provide new evidence that the contents of Part II and the firm’s ability to remediate the quality control concerns are known to audit clients prior to the public release.

Details

Managerial Auditing Journal, vol. 33 no. 8/9
Type: Research Article
ISSN: 0268-6902

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Book part

Deborah S. Archambeault

This chapter presents an approach for teaching divergent and evolving auditing standards in an introductory auditing course. The existence of divergent and continually…

Abstract

This chapter presents an approach for teaching divergent and evolving auditing standards in an introductory auditing course. The existence of divergent and continually evolving auditing standards can be challenging for students and for auditing educators. In addition to two separate sets of standards in the United States for the audits of public companies (issuers) and nonpublic companies (nonissuers), auditors also need to be aware of the growing prominence of international standards. In addition to providing background information on standard-setting bodies and divergent auditing standards, and suggestions for simplifying the process of guiding students to an understanding of these standards, this chapter provides figures that can be used for demonstration in class, along with a series of brief internet-based research exercises. The exercises and examples provided may help auditing educators to facilitate students’ understanding and mastery of the fundamental elements of the domestic and international auditing standard-setting forces and activities that impact, directly or indirectly, auditing practice in the United States and abroad.

Details

Advances in Accounting Education: Teaching and Curriculum Innovations
Type: Book
ISBN: 978-1-78190-840-2

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Article

C. Janie Chang, Yan Luo and Linying Zhou

The purpose of this study is to examine the impact of workloads at public accounting firms on the likelihood of an audit deficiency being identified during a triennial…

Abstract

Purpose

The purpose of this study is to examine the impact of workloads at public accounting firms on the likelihood of an audit deficiency being identified during a triennial inspection by the Public Company Accounting Oversight Board (PCAOB).

Design/methodology/approach

Using the human resource information disclosed in PCAOB inspection reports, this study constructs two firm-specific workload measures: the ratio of issuer clients to audit partners; and the ratio of issuer clients to professional staff. Firm-level audit deficiency is measured at three levels of severity: Do any of the audit engagements inspected by the PCAOB reveal an audit deficiency? Are any of the identified audit deficiencies directly related to the auditors’ failure to identify a departure from GAAP in the client’s financial statement? Are any of the identified audit deficiencies associated with a significant adjustment or restatement in the client’s subsequent period financial statements? This study uses logistic regression to examine the association between audit deficiency and the workload of public accounting firms.

Findings

The empirical evidence suggests that the workload of public accounting firms is positively associated with the likelihood of a deficient audit, auditor’s failure to identify client’s GAAP departure and/or an audit deficiency resulting in a significant adjustment or even a restatement of the client’s financial statements in the subsequent period.

Originality/value

This study is among the first to investigate the impact of firm workload on deficient audits.

Details

Review of Accounting and Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1475-7702

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Article

Hyungshin Park

This paper aims to examine whether investors perceive the adoption of Public Company Accounting Oversight Board (PCAOB) Rule 3211, which mandates disclosure of the…

Abstract

Purpose

This paper aims to examine whether investors perceive the adoption of Public Company Accounting Oversight Board (PCAOB) Rule 3211, which mandates disclosure of the identity of audit engagement partners for the US-listed companies, as providing net benefits to the companies.

Design/methodology/approach

This study identifies 33 events leading up to the adoption of the PCAOB rule and examines the market reaction around these events.

Findings

The author finds positive abnormal market-wide returns in response to events that increase the likelihood of adopting the mandate. These positive returns are relatively stronger among companies with higher audit risk and companies with high-quality auditors.

Practical implications

The results of this study indicate that market participants expect that the overall benefits from the audit engagement partner disclosure rule outweigh the associated costs for average firms and in particular for firms with high audit risk and high-quality auditors.

Originality/value

Prior studies document mixed evidence on the net effects of PCAOB Rule 3211 on audit quality and audit fees, potentially because of the short post-rule adoption period and the weak effect of the rule on audit quality and audit fees during the transition period. The author complements these studies by providing the first evidence on the way that the stock market reacts to events that change the likelihood of the adoption of the audit engagement partner disclosure mandate.

Details

Managerial Auditing Journal, vol. 36 no. 1
Type: Research Article
ISSN: 0268-6902

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Book part

James C. Lampe, Andy Garcia and Kerri L. Tassin

This article is the third in a trilogy of articles that discuss the professionalism (or deprofessionalism) of the accounting profession. The first examines the slow uphill…

Abstract

This article is the third in a trilogy of articles that discuss the professionalism (or deprofessionalism) of the accounting profession. The first examines the slow uphill climb of accounting and auditing practice to the level of being recognized as a highly trusted profession. The second examines the stagnation in professionalism leading to deprofessionalization of the accounting profession. This third article looks at the resulting directionless efforts of accounting and auditing firms in the wake of major deprofessionalization events. The interest in this study is the time period immediately following the passage of the Sarbanes–Oxley Act (SOX) of 2002 which is described in this paper as the “Post-SOX” history of public accountancy in the United States. During this time period, nearly equally mixed activities of professionalism and deprofessionalism have resulted in a status quo with directionless efforts doing little if anything to reverse decline in professionalism. Public accountants continued to experience conflict with the Securities and Exchange Commission (SEC) over independence rules. The large Certified Public Accountant firms generated controversies and squabbles concerning “auditing and consulting,” while at the same time they faced questions regarding the marketing and selling of aggressive tax shelters. In addition, most of the self-regulating aspects of the profession declined dramatically following passage of SOX. While initially both tax fees and audit fees of CPA firms increased during this time period, concerns are again arising as the large CPA firms more recently have renewed the emphasis on advisory services. While revenues have both increased and changed in composition during the post-SOX era, public opinion has maintained a status quo. The post-SOX era has also seen a weakening in the Code of Conduct, providing more liberties for CPAs to maximize self-interest. Meanwhile, the PCAOB faced constitutional challenges, while at the same time the AICPA experienced strong divisions in its membership. To provide some sense to these directionless efforts, this study, similar to the prior two articles in this trilogy, concludes with a summary analysis based on the nine SOCRECELIST criteria, and the question whether public accountants have learned their history lesson.

Details

Research on Professional Responsibility and Ethics in Accounting
Type: Book
ISBN: 978-1-78560-973-2

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