scholarly journals The PCAOB Audit Quality Indicator Framework Project: Feedback From Stakeholders

2019 ◽  
Vol 16 (1) ◽  
pp. 1-8 ◽  
Author(s):  
Arianna S. Pinello ◽  
Ara G. Volkan ◽  
Justin Franklin ◽  
Michael Levatino ◽  
Kimberlee Tiernan
Keyword(s):  
Quality Indicators ◽  
Financial Reporting ◽  
Audit Quality ◽  
The United States ◽  
Audit Committees ◽  
Tone At The Top ◽  
Reporting Framework ◽  
Public Company ◽  
Auditor Reporting ◽  
The U.S

Audit Quality Indicators (AQIs), as defined by the Center for Audit Quality, include four different elements:firm leadership and tone at the top; engagement team knowledge, experience, and workload; monitoring; and auditor reporting. AQIs are quantitative and qualitative measures designed to improve audit quality and help audit committees select the best audit firm for their current needs. They are intended to increase the reliability and accuracy of financial reporting. The Public Company Accounting Oversight Board (PCAOB) has issued a concept release proposing twenty-eight potential AQIs for use in the United States. The PCAOB release describes the AQI reporting framework and asks for public opinion on whether or not it should be implemented. This study reviews the comment letters in response to PCAOB Docket 041,Concept Release on Audit Quality Indicators, and the AQI reporting frameworks currently in place in the United Kingdom, Singapore, and other countries. After reviewing the PCAOB’s proposed AQI framework, response letters to Docket 041, and the AQI frameworks used in other countries, this paper provides an opinion on how the PCAOB should proceed with the AQI framework initiative in the U.S. The analysis suggests that AQI reporting should not be mandated in the U.S., but should become a flexible and voluntary framework that provides valuable information, enhances transparency in the audit profession, and establishes a commitment to the improvement of audit quality.

scholarly journals A Current Evaluation of Independence as a Foundational Element of the Auditing Profession in the United States

2019 ◽  
Vol 13 (1) ◽  
pp. P17-P27
Author(s):  
J. Gregory Jenkins ◽  
Jonathan D. Stanley
Keyword(s):  
United States ◽  
Financial Reporting ◽  
The United States ◽  
Auditor Independence ◽  
Audit Committees ◽  
Client Relationships ◽  
Reporting Process ◽  
Regulatory Approach ◽  
A Current ◽  
The U.S

SUMMARY This paper summarizes '“Auditor Independence in the United States: Cornerstone of the Profession or Thorn in Our Side?”' (Church, Jenkins, and Stanley 2018). Their paper maintains that while the concept of independence is theoretically appealing, it is fraught with practical problems. Church et al. (2018) analyze the current oversight of auditor independence in the U.S. and the need for auditor independence from the perspective of various parties involved in the financial reporting process. In doing so, the paper discusses implications and challenges affecting one or more of these parties. Finally, Church et al. (2018) evaluate alternatives to the current regulatory approach of prohibiting various auditor client relationships to manage auditor independence. The paper concludes that increasing audit committees' responsibilities for monitoring auditor independence, along with additional disclosure about threats and safeguards to auditor independence, is worthy of further discussion and debate as a path toward addressing the auditor independence conundrum.

Auditor Independence in the United States: Cornerstone of the Profession or Thorn in Our Side?

2018 ◽  
Vol 32 (3) ◽  
pp. 145-168 ◽  
Author(s):  
Bryan K. Church ◽  
J. Gregory Jenkins ◽  
Jonathan D. Stanley
Keyword(s):  
United States ◽  
Financial Reporting ◽  
The United States ◽  
Auditor Independence ◽  
Audit Committees ◽  
Systematic Evaluation ◽  
Client Relationships ◽  
Reporting Process ◽  
Regulatory Approach

SYNOPSIS The objective of this paper is to provide a systematic evaluation of independence as a foundational element of the auditing profession. We maintain that while independence is a theoretically appealing construct, it is fraught with practical problems surrounding its implementation, monitoring, and regulation. We analyze the current oversight of auditor independence and evaluate the need for auditor independence from the perspective of information users and information producers. In the process, we discuss important implications and intractable challenges that affect one or more parties involved in the financial-reporting process. Finally, we carefully evaluate alternatives to the current regulatory approach for managing auditor independence (i.e., proscribing various auditor-client relationships). We conclude that increasing audit committees' responsibilities for monitoring the auditor's independence—along with additional disclosure about threats and safeguards to auditor independence—is worthy of further consideration and debate as a path toward addressing the auditor independence conundrum.

scholarly journals Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

2018 ◽  
Vol 94 (2) ◽  
pp. 53-81 ◽  
Author(s):  
Lori Shefchik Bhaskar ◽  
Joseph H. Schroeder ◽  
Marcy L. Shepardson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Auditor Judgment ◽  
Public Company ◽  
Better Than

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.

Audit Firm Tenure and Fraudulent Financial Reporting

2004 ◽  
Vol 23 (2) ◽  
pp. 55-69 ◽  
Author(s):  
Joseph V. Carcello ◽  
Albert L. Nagy
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Auditor Independence ◽  
Fraudulent Financial Reporting ◽  
Audit Firm ◽  
Auditor Tenure ◽  
Sarbanes Oxley ◽  
Client Relationship ◽  
Mandatory Audit Firm Rotation ◽  
The U.S

The Sarbanes-Oxley Act (2002) required the U.S. Comptroller General to study the potential effects of requiring mandatory audit firm rotation. The General Accounting Office (GAO) concludes in its recently released study of mandatory audit firm rotation that “mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence” (GAO 2003, Highlights). However, the GAO also suggests that mandatory audit firm rotation could be necessary if the Sarbanes-Oxley Act's requirements do not lead to improved audit quality (GAO 2003, 5). We examine the relation between audit firm tenure and fraudulent financial reporting. Comparing firms cited for fraudulent reporting from 1990 through 2001 with both a matched set of non-fraud firms and with the available population of non-fraud firms, we find that fraudulent financial reporting is more likely to occur in the first three years of the auditor-client relationship. We fail to find any evidence that fraudulent financial reporting is more likely given long auditor tenure. Our results are consistent with the argument that mandatory audit firm rotation could have adverse effects on audit quality.

scholarly journals Does Industry Specialist Auditor Provide More Insights in Their audit report? An Empirical Study of Key Audit Matters Section

2021 ◽  
pp. 69-94
Author(s):  
Li-Jen He
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
The United States ◽  
International Standards ◽  
Audit Report ◽  
Disclosure Quality ◽  
Industry Specialization ◽  
Audit Reports ◽  
Industry Specialist

Abstract In 2015, International Auditing and Assurance Standards Board (IAASB) released new International Standards on Auditing 701 and required auditors to disclose key audit matters (KAM) in the audit report. Similar standards were also released in the United States in 2017 and the United Kingdom and Ireland Financial Reporting Council (FRC) in 2014. As KAM are expected to inform on matters of the greatest significance during an audit, before exploring the question regarding whether investors will obtain useful information from additional matter disclosures, the anterior consideration may be in regard to how audit quality affects the disclosure quality of KAM. This study use hand-collected data of the KAM disclosed in the audit reports of Taiwanese listed companies in 2016 to explore the association between auditor industry specialization and audit quality by the disclosure of KAM in new audit reports. The empirical results show that the association between the industrial specialist audit partner and the measurement of KAM quality is significantly positively related. The findings support our hypothesis that specialist auditors’ KAM are more informative than those issued by non-specialist auditors, and provide new evidence supporting prior studies about the superior auditing ability and disclosure quality of auditor industry specialist. Keywords: Key Audit Matters, KAM, International Standards on Auditing 701, International Auditing and Assurance Standards Board.

scholarly journals Does the Addition of Explicit Clarification of Auditor Independence Statement to the Auditor’s Report Matter to Equity Analysts?

2019 ◽  
Vol 8 (2) ◽  
pp. 156
Author(s):  
Xia Zhang ◽  
Kwadwo Ofori-Mensah
Keyword(s):  
Financial Reporting ◽  
Relevant Information ◽  
Auditor Independence ◽  
Research Practice ◽  
Stock Recommendations ◽  
Equity Analysts ◽  
The Public ◽  
Public Company ◽  
Auditor Reporting

The Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard to enhance the relevance and usefulness of the auditor’s report. One of the changes introduced in the new reporting model is the addition of a statement that explicitly clarifies the auditor’s independence (AS 3101.09.g). We administer a survey to investigate whether explicitly clarifying the auditor’s independence in the auditor’s report affects equity analysts’ perceptions of auditor independence, perceptions of financial reporting reliability, and their judgment when it comes to making stock recommendations to clients. A total of 123 equity analysts are recruited via Qualtrics for the study. The findings of the survey provide evidence that corroborates the position of the PCAOB that explicit clarification of auditor independence provides relevant information useful to public users such as equity analysts. Our study is the first to evaluate equity analysts’ perceptions about auditor independence using the new PCAOB auditor reporting model regarding the explicit clarification of auditor independence in the auditor’s report. Our study contributes to research, practice, and policy. 

The Big 4 Audit Report: Should the Public Perceive It as a Label of Quality?

2009 ◽  
Vol 9 (1) ◽  
pp. 148-165 ◽  
Author(s):  
Ross D. Fuerman ◽  
Michael Kraten
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Empirical Work ◽  
Model Specification ◽  
Audit Failure ◽  
The Public ◽  
Cpa Firms ◽  
Big 4 ◽  
Public Company ◽  
Auditor Litigation

ABSTRACT: There has been little research comparing the relative performance of the Big 4 CPA firms. Users of audited financial statements often practically have no other CPA firms to choose from for auditing services in the large public company auditing services market and thus desire more of this information. In 1,017 financial reporting lawsuits against Big 5 auditees filed from 1999 through 2004, the auditor litigation outcomes are used to proxy for the likelihood of audit failure and thus for audit quality. Control variables significant in prior empirical work were used in polytomous regression and in logistic regression. Ernst & Young has comparatively better auditor litigation outcomes, which proxy for a lower likelihood of audit failure and a stronger level of audit quality. The Ernst & Young results are robust; they are insensitive to the use of ten different model specifications. There is also evidence suggesting that PricewaterhouseCoopers may be a comparatively high quality auditor, but these latter results are sensitive to the model specification. Clearly, the null hypothesis of consistency in audit quality among the Big 4 CPA firms is rejected.

scholarly journals Auditing Issues with Chinese Reverse Merger Companies Traded in the United States

2012 ◽  
Vol 2 (2) ◽  
pp. 76
Author(s):  
Frederic M. Stiner ◽  
Susan A. Lynn
Keyword(s):  
United States ◽  
Audit Quality ◽  
The United States ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Future Research ◽  
Chinese Government ◽  
The Public ◽  
Reverse Mergers ◽  
Public Company

Recently there have been two issues related to Chinese companies seeking capital in the United States.   The first issue is frauds that have been perpetrated by companies using reverse mergers in order to go public.   The second issue is fraud in continuing audit engagements when there has been reliance by an American audit firm on a foreign accountant’s audit work.  There is also conflict between the Public Company Accounting Oversight Board (PCAOB) demanding to inspect audit workpapers for companies in China and the Chinese government’s refusal to let the PCAOB see these workpapers.   These issues relate to characteristics of the practice of accounting and auditing in China that threaten auditor independence and audit quality. The paper discusses: (1) issues involving reverse mergers and the response of the Securities and Exchange Commission (SEC) to these issues, (2) issues involving reliance on the work of foreign Certified Public Accountants (CPAs) and the response of the PCAOB to these issues, (3) issues involving conflicts between U.S.  regulatory agencies and the Chinese government over access to audit-related documents, and (4) suggestions for future research.

Litigation Risk and the Financial Reporting Credibility of Big 4 versus Non-Big 4 Audits: Evidence from Anglo-American Countries

2004 ◽  
Vol 79 (2) ◽  
pp. 473-495 ◽  
Author(s):  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Equity Capital ◽  
Brand Name ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Big 4 ◽  
Ex Ante ◽  
Anglo American ◽  
The U.S

Prior research suggests that Big 4 auditors provide higher quality audits in the U.S. in order to protect the firm's brand name reputation and to avoid costly litigation. In this study, we examine whether the perceived higher quality of a Big 4 audit is related to auditor litigation exposure or to reputation concerns. Specifically, we utilize an estimable proxy for financial reporting credibility—the ex ante cost of equity capital—to examine whether Big 4 auditors are perceived as providing higher quality audits (relative to non-Big 4 auditors) in the U.S., and in the less litigious (but economically similar) environments in other Anglo-American countries during the 1990–99 period. We find that a Big 4 audit is associated with a lower ex ante cost of equity capital for auditees in the U.S. but not in Australia, Canada, or the U.K. Our findings suggest that it is litigation exposure rather than brand name reputation protection that drives perceived audit quality.

Audit Quality Indicators: A Status Update on Possible Public Disclosures and Insights from Audit Practice

2010 ◽  
Vol 4 (1) ◽  
pp. C12-C19 ◽  
Author(s):  
Jean C. Bedard ◽  
Karla M. Johnstone ◽  
Edward F. Smith
Keyword(s):  
Advisory Committee ◽  
Quality Indicators ◽  
Audit Quality ◽  
Public Reporting ◽  
Global Network ◽  
Current Status ◽  
Sarbanes Oxley ◽  
Public Disclosures ◽  
The U.S

SUMMARY: This paper addresses the current status of the recommendation by the Advisory Committee on the Auditing Profession (ACAP) that auditing firms provide periodic reporting on audit quality indicators. We first consider several reasons why public reporting of audit quality indicators in the U.S. is highly controversial. We then report some information on how global network auditing firms are internally measuring audit quality in the post-Sarbanes-Oxley environment.

Sign in / Sign up

Export Citation Format

Share Document