Do Former Audit Firm Partners on Audit Committees Procure Greater Nonaudit Services from the Auditor?

2012 ◽  
Vol 88 (1) ◽  
pp. 297-326 ◽  
Author(s):  
Vic Naiker ◽  
Divesh S. Sharma ◽  
Vineeta D. Sharma
Keyword(s):  
Audit Committee ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Audit Committees ◽  
Future Research ◽  
Corporate Boards ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Nonaudit Services

ABSTRACT: To address potential threats to auditor independence, the Sarbanes-Oxley Act of 2002 (SOX) requires the audit committee to pre-approve nonaudit services (NAS) procured from the auditor. However, the presence of a former audit firm partner (FAP) affiliated with the current auditor on the audit committee could undermine the audit committee's due diligence over the NAS pre-approval process. To alleviate such concerns, the Securities and Exchange Commission approved a three-year “cooling-off” period for appointing audit firm alumni as independent directors. Our analyses show that the presence of both affiliated and unaffiliated FAPs on audit committees does not lead to greater NAS procured from the auditor; rather, FAPs reduce NAS procured from the auditor. Moreover, NAS decline significantly following the appointment of FAPs to the audit committee. Further tests suggest the three-year cooling-off period may not be warranted and deserves further investigation. Our study raises important implications for regulators, policy makers, corporate boards, and future research. Data Availability: Data are publicly available from sources identified in the text.

Does Mandated Disclosure Induce a Structural Change in the Determinants of Nonaudit Service Purchases?

2011 ◽  
Vol 30 (2) ◽  
pp. 51-76 ◽  
Author(s):  
Lawrence J. Abbott ◽  
Susan Parker, and ◽  
Gary F. Peters
Keyword(s):  
Structural Changes ◽  
Agency Cost ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Audit Committees ◽  
Managerial Ownership ◽  
Market Responses ◽  
Sarbanes Oxley ◽  
The Impact

SUMMARY We investigate the association between mandated fee disclosures and structural changes in the determinants of nonaudit services (NAS). The Securities and Exchange Commission (SEC) underscored the importance of understanding the impact of disclosures when the Auditor Independence Rules of 2000 explicitly relied on market responses to discipline NAS purchases. In contrast, the Sarbanes-Oxley Act of 2002 (SOX) relied upon prohibitions of NAS. Our findings suggest that market-based approaches were functioning prior to SOX prohibitions. We find that after the SEC mandated fee disclosures, NAS purchases become negatively associated with firms seeking financing and positively associated with managerial ownership. We also document a significantly smaller propensity for NAS purchases among larger firms, compared to a nondisclosure environment. Last, we find that mandated disclosures significantly increase the negative association between NAS purchases and effective audit committees. Collectively, our findings are consistent with mandated disclosures increasing agency cost incentives for limiting NAS purchases. Data Availability: The data are available from public sources.

Auditor Independence: A Focus on the SEC Independence Rules

2008 ◽  
Vol 23 (2) ◽  
pp. 247-260 ◽  
Author(s):  
Audrey A. Gramling ◽  
Vassilios Karapanos
Keyword(s):  
Audit Committee ◽  
Financial Statements ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Background Information ◽  
Instructional Resources ◽  
Sarbanes Oxley ◽  
Policy Goals ◽  
Public Company ◽  
Securities Laws

Auditor independence is an important underpinning of the federal securities laws. These laws require that registrants' financial statements filed with the Securities and Exchange Commission (SEC) be audited by independent public accountants. The focus on independence for public company auditors was increased in light of the requirements of the Sarbanes-Oxley Act of 2002 to strengthen auditor independence. These instructional resources provide background information on the current SEC auditor independence rules. After becoming familiar with these rules, you will have the opportunity to complete several case scenarios that address: (1) hypothetical settings that may represent violations of the SEC independence rules, (2) possible actions that an audit committee might take when it determines that the SEC independence rules may have been violated, and (3) possible alternatives to the current SEC independence rules that could achieve the desired public policy goals of objective audits and investor confidence.

Who's Really in Charge? Audit Committee versus CFO Power and Audit Fees

2014 ◽  
Vol 89 (6) ◽  
pp. 2057-2085 ◽  
Author(s):  
Matthew J. Beck ◽  
Elaine G. Mauldin
Keyword(s):  
Audit Committee ◽  
Economic Recession ◽  
Audit Fees ◽  
Auditor Independence ◽  
Negotiation Process ◽  
Data Availability ◽  
Audit Committees ◽  
Exogenous Shock ◽  
Cast Doubt ◽  
Recent Financial Crisis

ABSTRACT Although regulation makes audit committees responsible for determining and negotiating audit fees, researchers and practitioners express concerns that CFOs continue to control these negotiations. Thus, regulation may give investors a false sense of security regarding auditor independence. We utilize the recent financial crisis and economic recession as an exogenous shock that allows us to shed light on the relative influence of the audit committee and the CFO on fee negotiations. During the recession, we find larger fee reductions in the presence of more powerful CFOs, and smaller fee reductions in the presence of more powerful audit committees. We also find the CFO or the audit committee primarily influences fees when their counterpart is less powerful. Our findings suggest a more complex relationship between the CFO and the audit committee than current regulations recognize and cast doubt on the ability of regulation to force one structure on the negotiation process. Data Availability: Data are available from public sources identified in the text.

SEC chief accountant shines spotlight on audit committees

2018 ◽  
Vol 19 (4) ◽  
pp. 4-5
Author(s):  
Stephen G. Stroup
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Securities And Exchange Commission ◽  
Audit Committees ◽  
Corporate Boards ◽  
Securities Litigation ◽  
Content Type ◽  
The Public ◽  
Market Risks ◽  
Baruch College

Purpose To explain and analyze remarks concerning the importance and responsibility of corporate audit committees made by US Securities and Exchange Commission (SEC) Chief Accountant Wesley Bricker before the Baruch College Financial Reporting Conference on May 3, 2018. Design/methodology/approach Discusses Mr Bricker’s remarks in three principal areas: the role of audit committees in clearly understanding non-GAAP measures presented to the public, the attentiveness of audit committees to disclosures regarding changes in market risks, and the importance of independent, diverse thinking on corporate boards, and particularly, audit committee, brought by independent directors as an element of strong corporate governance. Findings The coming months may offer a better indication whether Mr Bricker’s speech is simply a specific point of emphasis from the Office of the Chief Accountant or is perhaps intended to foreshadow a contemplated or ongoing enforcement initiative. Originality/value Expert guidance from experienced lawyer with specialties in SEC investigative and enforcement actions, securities litigation, accountants’ defense, white collar criminal defense and corporate investigations

Audit Committee Member Support for Proposed Audit Adjustments: Pre-SOX versus Post-SOX Judgments

2008 ◽  
Vol 27 (1) ◽  
pp. 85-104 ◽  
Author(s):  
F. Todd DeZoort ◽  
Dana R. Hermanson ◽  
Richard W. Houston
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Committee Member ◽  
Audit Committees ◽  
Future Research ◽  
Reporting Accuracy ◽  
Sarbanes Oxley ◽  
Public Company

This study examines differences in audit committee member judgments before the Sarbanes-Oxley Act (“pre-SOX”) versus after the act was passed (“post-SOX”) as well as audit committee member perceptions of the effects of SOX. Based on experimental materials administered to 372 public company audit committee members (131 pre-SOX from DeZoort et al. [2003a] and 241 post-SOX), we find that audit committee support for an auditor-proposed adjustment is significantly higher in the post-SOX period. Additional analyses reveal that the effect of SOX differs between audit committee members who are CPAs versus non-CPAs. Specifically, the greater audit committee member support for the proposed adjustment post-SOX is attributable to members who are CPAs. In general, audit committee members in the post-SOX period feel more responsible for resolving the accounting issue, perceive that audit committee members have greater expertise to evaluate the accounting issue, and also are more concerned with reporting accuracy and a need for conservative financial reporting than those in the pre-SOX period. We also find that post-SOX respondents who support the auditor's proposed adjustment have more favorable views of the benefits of SOX, and they believe more strongly that audit committees in the post-SOX period are more conservative and have more power than they did pre-SOX. We discuss implications and avenues for future research.

The Effects of Joint Provision and Disclosure of Nonaudit Services on Audit Committee Members' Decisions and Investors' Preferences

2006 ◽  
Vol 81 (4) ◽  
pp. 873-879 ◽  
Author(s):  
Lisa Milici Gaynor ◽  
Linda S. McDaniel ◽  
Terry L. Neal
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Auditor Independence ◽  
Audit Committees ◽  
Disclosure Requirement ◽  
Nonaudit Services ◽  
Public Disclosures ◽  
Joint Provision ◽  
Corporate Governance Reforms ◽  
Governance Reforms

Recent corporate governance reforms that require audit committees to pre-approve audit and nonaudit services increase audit committees' accountability to third parties for actual auditor independence and audit quality. Other SEC reforms mandate the disclosure of fees for auditor-provided services and are aimed at influencing investors' perceptions of auditor independence. These fee disclosures also reveal audit committees' pre-approval decisions, enhancing public accountability. Thus, audit committees may be less willing to hire auditors for nonaudit services to avoid fee disclosures, even when joint provision improves audit quality. One hundred experienced corporate directors, responding as audit committee members or investors, participated in an experiment in which we manipulated the effect of the auditor's provision of nonaudit services on audit quality and the fee disclosure requirement. We find that audit committee members are more likely to recommend joint provision if audit quality improves, consistent with investors' preferences. However, unlike investors, committee members are more reluctant to recommend joint provision when public disclosures are required, even at the expense of audit quality. These findings offer evidence about an indirect effect of recent reforms.

Audit Committee Composition and Shareholder Actions: Evidence from Voting on Auditor Ratification

2003 ◽  
Vol 22 (2) ◽  
pp. 253-263 ◽  
Author(s):  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Audit Committee ◽  
Empirical Support ◽  
Auditor Independence ◽  
Securities And Exchange Commission ◽  
Audit Committees ◽  
Independent Directors ◽  
Client Relationships ◽  
Audit Performance

Recent actions related to audit committees by the Securities and Exchange Commission (SEC) reflect the Commission's belief that the composition of audit committees can influence the monitoring of auditor-client relationships, and thereby influence shareholder perceptions about auditor independence and overall audit performance. The SEC has also suggested that shareholder perceptions about the auditor will influence shareholder actions, including voting on ratifying the auditor selected by management. This paper examines the association between audit committee composition and shareholder actions, using auditor ratification data from 199 companies. The results indicate that, in companies with high nonaudit fee ratios, shareholders are less likely to vote against auditor ratification if the audit committee has solely independent directors. These results provide empirical support to the assertions of the SEC and others that audit committee composition can impact investors' perceptions and actions. However, the low percent of votes against auditor ratification indicates that the results must be interpreted with caution.

The Effect of Evidence Strength and Internal Rewards on Intentions to Report Fraud in the Dodd-Frank Regulatory Environment

2013 ◽  
Vol 32 (3) ◽  
pp. 87-104 ◽  
Author(s):  
Alisa G. Brink ◽  
D. Jordan Lowe ◽  
Lisa M. Victoravich
Keyword(s):  
Securities And Exchange Commission ◽  
Data Availability ◽  
Audit Committees ◽  
Monetary Incentives ◽  
Sarbanes Oxley ◽  
Evidence Strength ◽  
Internal Whistleblowing ◽  
The Impact ◽  
Internal Incentive ◽  
Reporting Intentions

SUMMARY: There are many unanswered questions and concerns regarding the consequences of the fraud whistleblowing environment created by the Sarbanes-Oxley (SOX) and Dodd-Frank Acts. While SOX requires audit committees to implement anonymous internal reporting channels, the Dodd-Frank Act offers substantial monetary incentives that encourage reporting to the Securities and Exchange Commission (SEC). To mitigate concerns that employees might bypass internal channels, some companies are considering offering internal whistleblowing incentives. However, it is unclear how internal incentives will affect employee whistleblowing behavior. We experimentally examine the impact of an internal incentive on employees' intentions to report fraud. Across treatments, we find a greater likelihood of reporting internally than to the SEC. Evidence strength interacts with the presence of an internal incentive such that SEC reporting intentions are greatest when evidence is strong and an internal incentive is present. When evidence is weak, the presence of an internal incentive decreases SEC reporting intentions. Data Availability: Data used in this study are available from the authors upon request.

scholarly journals Audit Firm Perspective on Audit Firm Rotation and Enhancing Independence: Evidence from PCAOB Comment Letters

2016 ◽  
Vol 11 (1) ◽  
pp. A22-A44
Author(s):  
L. Tyler Williams ◽  
W. Mark Wilder
Keyword(s):  
Audit Committee ◽  
Auditor Independence ◽  
Overwhelming Majority ◽  
Data Availability ◽  
Public Accounting ◽  
Accounting Firms ◽  
Audit Firm ◽  
Public Accounting Firms ◽  
Comment Letters ◽  
Alternative Solutions

SUMMARY This study examines practitioners' perspectives on audit firm rotation and alternative solutions to enhance independence in the audit industry as solicited by the PCAOB's “Concept Release on Audit Firm Rotation and Auditor Independence.” Accordingly, we synthesize the opinions found in comment letters of 15 American public accounting firms—eight of which are annually inspected by the PCAOB and seven of which are inspected tri-annually. Altogether, we find the firms generally offer homogenous rationale for opposition to audit firm rotation. However, most importantly, we note that the overwhelming majority of the alternative solutions offered by the firms to enhance the independence relationship between auditor and client lies with fortifying the audit committee. To that end, while regulators have generally attempted to strengthen independence by introducing regulation at the auditor level, our review indicates that perhaps a shift in regulatory philosophy is warranted—one that suggests progressing regulation at the client level. Data Availability: Publicly available.

Reviewing the SEC's Review Process: 10-K Comment Letters and the Cost of Remediation

2013 ◽  
Vol 88 (6) ◽  
pp. 1875-1908 ◽  
Author(s):  
Cory A. Cassell ◽  
Lauren M. Dreher ◽  
Linda A. Myers
Keyword(s):  
Review Process ◽  
Fair Value ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Additional Time ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Comment Letters ◽  
Time Required ◽  
The Cost

ABSTRACT: Securities and Exchange Commission (SEC) comment letters provide independent and timely feedback on the clarity of disclosures and on the extent to which filings comply with Generally Accepted Accounting Principles and SEC reporting regulations. We investigate factors that affect the probability of receiving a 10-K comment letter, the extent of comments received, and the cost of remediation. We find that in addition to factors explicitly stated to increase SEC scrutiny in Section 408 of the Sarbanes-Oxley Act, low profitability, high complexity, engaging a small audit firm, and weaknesses in governance are positively associated with the receipt of a comment letter, the extent of comments, and the cost of remediation. The probability that the comment letter results in a restatement is higher for smaller companies and for companies engaging a small audit firm. We also provide evidence that comments relating to accounting issues result in higher remediation costs, largely due to the additional time required to resolve comments relating to classification issues and fair value issues. Our findings should be of interest to stakeholders who use SEC comment letters to assess disclosure quality and reporting compliance, and to managers and other stakeholders impacted by costs associated with the SEC's review process. Data Availability All data used in the study are publicly available from the sources cited in the text.

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