scholarly journals A Review of the PCAOB’s Enforcement Program: 2005–2017

2020 ◽  
Author(s):  
Carl W. Hollingsworth ◽  
James H. Irving
Keyword(s):  
Overwhelming Majority ◽  
Sample Period ◽  
Pronounced Increase ◽  
Professional Obligations ◽  
Audit Firms ◽  
Time Period ◽  
Audit Evidence ◽  
Auditing Standards

This study examines the PCAOB’s Division of Enforcement from 2005 to 2017, a time period when it expanded from a $5 million to a $22 million program area.  We find that a pronounced increase in disciplinary orders issued during the latter years of the sample period is attributable to serious audit deficiencies and misconduct by triennially inspected audit firms, non-U.S. audit firms, and firms auditing brokers and dealers.  We also find that more than two-thirds of the violations of PCAOB auditing standards described in these disciplinary orders pertain to failures in general audit principles and responsibilities, obtaining audit evidence, and review and communication.  Finally, we find that the PCAOB levies punitive sanctions on an overwhelming majority of audit personnel and audit firms cited in these disciplinary orders.  Overall, our results indicate that the PCAOB’s enforcement function has actively disciplined audit personnel and audit firms that breached their professional obligations.

Enhancing Auditors’ Reliance on Data Analytics under Inspection Risk Using Fixed and Growth Mindsets

2021 ◽  
Author(s):  
Tongrui Cao ◽  
Rong-Ruey Duh ◽  
Hun-Tong Tan ◽  
Tu Xu
Keyword(s):  
Data Analytics ◽  
Growth Mindset ◽  
Psychology Research ◽  
Fixed Mindset ◽  
Audit Firms ◽  
Audit Evidence ◽  
Big Four

Audit firms have invested significantly in data analytics (DA). However, evidence shows that auditors are often reluctant to rely on DA. A major auditor concern is that inspectors will second-guess the audit evidence gathered using DA. Drawing on psychology research, we examine how the effect of inspection risk on auditors’ reliance on DA is moderated by a fixed mindset (a belief that one’s ability is fixed) versus a growth mindset (a belief that one’s ability is malleable). In an experiment with Big Four auditors as participants, we find that, relative to low inspection risk, high inspection risk reduces auditors’ reliance on DA when auditors are prompted with a fixed mindset, but increases it when auditors are prompted with a growth mindset. Our findings contribute to auditing literature on DA, inspection risk, and mindsets, and have implications for auditors, audit firms, and regulators.

When Should Audit Firms Introduce Analyses of Big Data Into the Audit Process?

2017 ◽  
Vol 31 (3) ◽  
pp. 81-99 ◽  
Author(s):  
Anna M. Rose ◽  
Jacob M. Rose ◽  
Kerri-Ann Sanderson ◽  
Jay C. Thibodeau
Keyword(s):  
Big Data ◽  
Audit Process ◽  
Processing Mode ◽  
Big 4 ◽  
Audit Firms ◽  
Audit Evidence ◽  
Evaluation Of Evidence ◽  
Data Visualizations ◽  
Professional Judgments

ABSTRACT This study investigates how the timing of the consideration of Big Data visualizations affects an auditor's evaluation of evidence and professional judgments. In addition, we examine whether the use of an intuitive processing mode, as compared to a deliberative processing mode, influences an auditor's use and evaluation of Big Data visualizations. We conduct an experiment with 127 senior auditors from two Big 4 firms and find that auditors have difficulty recognizing patterns in Big Data visualizations when viewed before more traditional audit evidence. Our findings also indicate that auditors who view Big Data visualizations containing patterns that are contrary to management assertions after they view traditional audit evidence have greater concerns about potential misstatements and increase budgeted hours more. Overall, our results suggest that Big Data visualizations used as evidential matter have fewer benefits when they are viewed before auditors examine more traditional audit evidence.

Does the Disclosure of PCAOB Inspection Findings Increase Audit Firms' Litigation Exposure?

2020 ◽  
Author(s):  
Brant E. Christensen ◽  
Nathan G. Lundstrom ◽  
Nathan J. Newton
Keyword(s):  
Audit Quality ◽  
Legal Action ◽  
Litigation Risk ◽  
Audit Firms ◽  
Auditing Standards ◽  
Triggering Events ◽  
Public Signal

We examine whether PCAOB inspection reports increase auditors' litigation risk. We find that inspection reports with audit deficiencies are positively associated with the number of lawsuits subsequently filed against the inspected auditor. These results are strongest when client-level lawsuit triggering events have already occurred and when PCAOB inspection content is arguably more persuasive. Importantly, these results pertain exclusively to triennially inspected audit firms for which the set of other publicly available signals of audit quality is limited. Furthermore, we do not argue that inspection reports in isolation trigger lawsuits. Instead, once events such as restatement announcements or bankruptcies create the potential for legal action against the auditor, inspection reports provide a public signal about past noncompliance with auditing standards. This signal likely increases lawyers' perceived strength of case against the auditor before the lawsuit is filed and before lawyers have access to the audit workpapers.

Comparison of federal auditing standards and ISA. Audit evidence

Auditor ◽  
2015 ◽  
Vol 0 (23) ◽  
pp. 36-42 ◽  
Author(s):  
K.- Gaydarov
Keyword(s):  
Audit Evidence ◽  
Auditing Standards

Practitioner Summary of Can Auditors Reduce Negligence Verdicts? An Examination of Remedial Tactics

2012 ◽  
Vol 6 (2) ◽  
pp. P1-P6 ◽  
Author(s):  
Robert M. Cornell ◽  
Martha M. Eining ◽  
Rick C. Warne
Keyword(s):  
Civil Litigation ◽  
First Person ◽  
Litigation Risk ◽  
Audit Firms ◽  
Mock Trial ◽  
Auditing Standards ◽  
Trial Setting

SUMMARY This article summarizes our recent study, “The Use of Remedial Tactics in Negligence Litigation” (Cornell et al. 2009). Auditors face significant litigation risk when adverse economic events occur with clients, even when the auditors followed Generally Accepted Auditing Standards (GAAS) when they conducted the audit. Civil litigation rules in many U.S. jurisdictions allow plaintiffs to compel testimony from defendants during trial proceedings. We investigated whether auditors could use verbal remediation tactics to reduce the likelihood of guilty verdicts when accused of professional negligence. In a mock trial setting, we examined whether an apology and/or a first-person justification offered by an auditor-defendant results in fewer negligence verdicts against audit firms. Our results indicate that, when an auditor testifies and expresses an apology and/or a first-person justification, jurors find the auditor guilty of negligence about half as often as when no remedial tactic is used. These findings provide evidence that auditors accused of negligence may effectively utilize such tactics to defend their audit decisions and actions.

Testing Fiscal Dominance Hypothesis in a Structural VAR Specification for Pakistan

2018 ◽  
Vol 65 (1) ◽  
pp. 51-63 ◽  
Author(s):  
Rozina Shaheen
Keyword(s):  
Structural Var ◽  
Sample Period ◽  
Entire Sample ◽  
Interesting Phenomenon ◽  
Military Regimes ◽  
Time Period ◽  
Fiscal Dominance ◽  
Primary Deficit ◽  
Auto Regression

Abstract This research aims to test the fiscal dominance hypothesis for Pakistan through a bivariate structural vector auto regression (SVAR) specification, covering time period 1977 – 2016. This study employs real primary deficit (non interest government expenditures minus total revenues) and real primary liabilities (sum of monetary base and domestic public debt) as indicators of fiscal measures and monetary policy respectively. A structural VAR is retrieved both for entire sample period and four sub periods (1977 – 1986, 1987 – 1997, 1998 – 2008, and 2009 – 2016). This study identifies the presence of fiscal dominance for the entire sample period and the sub period from 1987 – 2008. The estimates reveal an interesting phenomenon that fiscal dominance is significant in the elected regimes and weaker in the presence of military regimes in Pakistan. From a policy perspective, this research suggests increased autonomy of central bank to achieve long term price stability and reduced administration costs to ensure efficient democratic regime in Pakistan.

The Global Financial Crisis: U.S. Bankruptcies and Going-Concern Audit Opinions

2013 ◽  
Vol 28 (1) ◽  
pp. 59-75 ◽  
Author(s):  
Marshall A. Geiger ◽  
K. Raghunandan ◽  
William Riccardi
Keyword(s):  
Financial Crisis ◽  
Global Financial Crisis ◽  
Going Concern ◽  
Business Press ◽  
Big 4 ◽  
Audit Firms ◽  
Auditing Standards ◽  
Audit Opinions ◽  
The Global Financial Crisis

SYNOPSIS This study investigates whether auditors' going-concern modified opinion (GCO) decisions were less likely after the start of the recent “Global Financial Crisis” (GFC). Auditing regulators and the business press had complained that auditors did not provide adequate warning in their reports prior to many companies filing for bankruptcy during the GFC. Accordingly, we examine auditors' GCO opinions for financially stressed clients that subsequently entered into bankruptcy during the period from 2004 to 2010. We find that, after controlling for other factors related to GCOs, the propensity of auditors to issue a GCO prior to bankruptcy significantly increased after the onset of the GFC. Additional tests reveal similar results when we separately examine clients of the Big 4 and non-Big 4 firms, suggesting both sized firms significantly increased the likelihood of issuing a GCO to a subsequently bankrupt client after the start of the GFC. Our results should be of interest to regulators, investors, audit firms, academics, and standard setters as they evaluate U.S. auditor performance during the GFC, and in contemplation of changes to auditing standards as a result of the GFC.

scholarly journals Do Auditing Standards Matter?

2013 ◽  
Vol 7 (2) ◽  
pp. A1-A16 ◽  
Author(s):  
W. Robert Knechel
Keyword(s):  
Audit Quality ◽  
Economic Value ◽  
Common Denominator ◽  
Audit Process ◽  
Economic Role ◽  
Audit Firms ◽  
Auditing Standards ◽  
Potential Demand ◽  
Information Advantage ◽  
Professional Expert

SUMMARY Properly understanding the economic role of auditing standards is an important step toward improving both audit effectiveness and efficiency. In this essay, I observe that auditing standards are most important when an auditor may have an incentive to under-audit. While this conclusion may not come as a surprise, the conditions under which standards may, or may not, have a desirable effect on audit quality are less obvious. More specifically, I present a number of observations about what standards can do: Standards can (1) compensate for the lack of observability of the audit outcome by focusing on the audit process; (2) partially mitigate the information advantage possessed by the auditor as a professional expert that might motivate the auditor to under-audit; (3) counterbalance the diversity of demand across multiple stakeholders that might drive the audit to the lowest common denominator and create a market based on adverse selection; and (4) provide a benchmark that facilitates the calibration of an auditor's legal liability in the event of a substandard audit. However, I also present a number of observations about what standards should not try to do: Standards should not (1) discourage the use of judgment by auditors; (2) limit the potential demand for economically valuable alternative levels of assurance; (3) lead to excessive procedural routine or standardization in the conduct of the audit; and (4) be set based on an enforcement agenda. In the end, standards overreach may undermine the economic value of the audit to many stakeholders and lead to fee pressure for audit firms. Hopefully, these insights can inform future debates about the level and types of standards that are appropriate for the auditing profession.

scholarly journals If auditors are like Belgian beers, which style would you prefer?

2016 ◽  
Vol 90 (9) ◽  
pp. 341-347
Author(s):  
Herman van Brenk ◽  
Liesbeth Bruynseels
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Black Box ◽  
Firm Level ◽  
Audit Firm ◽  
Internal Working ◽  
Audit Firms ◽  
Auditing Standards ◽  
Zoom In ◽  
Audit Team

Recent research by Francis, Pinnuck, and Watanabe (2014) has shown that financial reporting outcomes are influenced by the audit firm’s unique audit style. They argue that audit firm styles are driven by their “unique set of internal working rules that guide the auditor’s application of accounting and auditing standards” (Francis, Pinnuck & Watanabe, 2014). In our discussion, we zoom in on this study and call for further research on the factors that determine audit styles. Specifically, we emphasize the importance of extending this research from the audit firm level to the level of the audit office, audit team, and individual auditor. We conclude with the notion that intense collaboration between audit firms and academia is instrumental in opening the black box of audit styles to extend our knowledge on the root causes and drivers of audit quality.

scholarly journals Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Release No. 2015-004, Supplemental Request for Comment: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form

2015 ◽  
Vol 10 (1) ◽  
pp. C1-C10 ◽  
Author(s):  
Marcus M. Doxey ◽  
Marshall A. Geiger ◽  
Karl E. Hackenbrack ◽  
Sarah E. Stein
Keyword(s):  
Data Availability ◽  
The Public ◽  
Related Information ◽  
Audit Firms ◽  
Public Company ◽  
Auditing Standards ◽  
New Form

SUMMARY On June 30, 2015 the Public Company Accounting Oversight Board (PCAOB) issued a supplemental request for comment on its 2013 reproposal to require auditors to disclose in the auditor's report the name of the engagement partner and information about certain other participants in the audit. The supplemental request solicited public comments on an alternative to disclosure of this information in the auditor's report, namely that audit firms report (1) the name of the engagement partner, and (2) the names, locations, and extent of participation of other audit participants in a new form (Form AP) to be filed with the PCAOB within 30 days of the date the auditor's report is first included in a document filed with the SEC. The comment period ended on August 31, 2015. This commentary summarizes the participating committee members' views on the alternatives presented in the supplemental request for comment. Data Availability: The exposure drafts of the proposed and reproposed rules, the supplemental request for comment, and related information are available at: http://pcaobus.org/Rules/Rulemaking/Pages/Docket029.aspx

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