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1
Bailey, Andrew D. "Perspectives on the Public Company Accounting Oversight Board (PCAOB) 2004–2005." Accounting Horizons 28, no. 4 (2014): 889–99. http://dx.doi.org/10.2308/acch-50877.
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SYNOPSIS This commentary reflects my experiences with the U.S. Securities and Exchange Commission (SEC) during the academic year 2000/2001 (Academic Fellow) and the two calendar years 2004–2005 (Deputy Chief Accountant [Professional Practice]). These comments reflect only my thoughts without citations in support of or contrary to those thoughts and resulting opinions. The topics covered in this commentary include: (1) early staff relations between the PCAOB and SEC in their respective roles of audit standard setter and oversight agency; (2) the PCAOB decision to act as the sole audit standard setter for registered public companies displacing the AICPA in this role; (3) the PCAOB's approach to “revising” the interim audit standards through Rule 3101, Certain Terms Used in Auditing and Related Professional Practice Standards; (4) Audit Standard 3 (AS3), Audit Documentation; and (5) Audit Standard 2 (AS2), An Audit of Internal Control over Financial Reporting Performed in Conjunction With an Audit of Financial Statements. I will also comment on several observations made by others concerning the competence of PCAOB staff and the PCAOB Board members to set audit standards and perform meaningful inspections. I conclude with a brief note on the international aspects of PCAOB actions during this period.
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Wang, Dechun, and Jian Zhou. "The Impact of PCAOB Auditing Standard No. 5 on Audit Fees and Audit Quality." Accounting Horizons 26, no. 3 (2012): 493–511. http://dx.doi.org/10.2308/acch-50183.
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SYNOPSIS We investigate the impact of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5 (AS5) on audit fees and audit quality. AS5 supersedes Auditing Standard No. 2 (AS2), and became effective for audits for accelerated filers for fiscal years ending on or after November 15, 2007. Using a large sample of accelerated filers subject to AS5, we find evidence that audit fees decrease upon the adoption of AS5. More importantly, even though AS5 adoption reduces audit fees for our test sample, we find no evidence of a decrease in audit quality. In summary, we document evidence that AS5 improves the efficiency of internal control audits. JEL Classifications: M41.
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Krishnan, Jagan, Jayanthi Krishnan, and Hakjoon Song. "The Effect of Auditing Standard No. 5 on Audit Fees." AUDITING: A Journal of Practice & Theory 30, no. 4 (2011): 1–27. http://dx.doi.org/10.2308/ajpt-10173.
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SUMMARY In June 2007, the PCAOB issued Auditing Standard No. 5 (AS5), superseding Auditing Standard No. 2 (AS2). AS5 significantly changed the rules relating to audits of internal control over financial reporting (ICFR). Policymakers expected AS5 to lead to improvements in audit efficiency and thus a general reduction in audit costs, and specifically a reduction in fees for smaller and less complex companies that were disproportionately affected by AS2. We investigate the impact of the change from AS2 to AS5 on audit fees. We restrict our analysis to stable client-auditor combinations to ensure that auditors had prior AS2 experience with the client before the transition to AS5. We find that, after controlling for other factors, audit fees were lower in the first two years of implementation of AS5 relative to the last year of AS2. The decrease in fees was the highest for companies that had remediated material weaknesses in their internal control and thus moved from an adverse opinion under AS2 to a clean opinion under AS5. Further, firms that received first-time adverse opinions on their internal control in the AS5 period paid lower fee premiums (relative to firms with clean opinions) than did firms with adverse reports in the last AS2 year. Finally, in contrast to policymakers' expectations that AS5 would generate cost savings by allowing the ICFR audits to be “scaled” for small and less complex firms, there is no evidence that the smallest firms benefited. Specifically, audit fee savings were found only for relatively more complex firms (measured by multiple segments and international operations).
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Mitra, Santanu, Hakjoon Song, and Joon Sun Yang. "The Effect of Auditing Standard No. 5 on Audit Report Lags." Accounting Horizons 29, no. 3 (2015): 507–27. http://dx.doi.org/10.2308/acch-51052.
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SYNOPSIS Auditing Standard No. 5 (AS5) introduced by the Public Company Accounting Oversight Board (PCAOB) in June 2007 requires a top-down risk-based approach in auditing and is expected to improve audit efficiency and make the overall auditing process timelier by reducing audit report lags. We investigate the impact of AS5 on audit report lags over an extended period from 2006 to 2011 and find that audit report lags are lower in the AS5 years (2007–2011) relative to the AS2 years (2006–2007). But this reduction is evident mostly for the firms with clean SOX 404 opinions. The presence of material internal control weaknesses (ICW) significantly increases audit report lags, but AS5 does not have any incremental moderating effect on report lags and the ICW relationship. Tests for the firms with company-level and account-specific ICWs demonstrate identical results. Additional analyses show that the learning curve effect takes place rapidly in the early part of the AS5 period and audits continue to remain efficient in terms of reduced report lags in the latter part of the AS5 period relative to the AS2 period. The year-to-year change analyses for the AS5 period further corroborate this result. Overall, our study demonstrates that the top-down, risk-based approach under AS5 makes the audit process more efficient and timelier by decreasing audit report lags. Data Availability: Data are available from public sources identified in the paper.
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Nolder, Christine, and Zoe-Vonna Palmrose. "Economic Analysis of Proposed PCAOB Standards: Finding a Path Forward." Accounting Horizons 32, no. 2 (2018): 183–200. http://dx.doi.org/10.2308/acch-52082.
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SYNOPSIS The pace of standard-setting by the Public Company Accounting Oversight Board (PCAOB) has been glacial, which increases the risk that U.S. auditing standards are not keeping up with the global audit environment. Legislation enacted in 2012 that created the need to conduct economic analysis of proposed PCAOB standards added important considerations. If appropriately integrated into the process, these considerations can improve PCAOB standard-setting. We describe the PCAOB's current approach to economic analysis and offer recommendations to improve the coherence, usefulness, and relevance of the evidence sought to justify the need for standard-setting. Our recommendations involve a tailored approach that (1) differentiates among types of PCAOB standards based on considering their overarching purpose and target audience; (2) recognizes appropriate theories that are unique to each type of standard—whether economic or other theories; and (3) develops audit-centric core principles focused on audit quality on which to ground the discussion of each proposed standard. We hope our commentary shifts thinking about the approach to economic analysis to improve PCAOB standard-setting, stimulates academic discussion of these and other important issues facing the standard-setting process in the U.S., and inspires relevant research that informs PCAOB standard-setting.
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De Jager, N. G., and Niels Van Nieuw Amerongen. "SOx-404 en steunen op de testwerkzaamheden van de gecontroleerde onderneming." Maandblad Voor Accountancy en Bedrijfseconomie 79, no. 12 (2005): 601–11. http://dx.doi.org/10.5117/mab.79.13832.
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Dit artikel behandelt de vraag in hoeverre de externe accountant mag steunen op de testwerkzaamheden van interne functionarissen bij de geïntegreerde controle (de tra ditionele jaarrekeningcontrole en de attestatie van de interne beheersingsmaatregelen)1. Specifiek wordt ingegaan op terzake relevante aspecten zoals beschreven in Auditing Standard No.2 (AS2; PCAOB, 2004). AS2 beoogt de accountant meer flexibiliteit te geven in het steunen op de testwerkzaamheden van de gecontroleerde onderneming zonder dat dit de kwaliteit van de controle van de externe accountant beïnvloedt. Flexibiliteit is hoofdzakelijk aanwezig in het steunen op testwerkzaamheden met betrekking tot routinematige processen. Echter, de randvoorwaarden rond het steunen op de testwerkzaamheden (objectiviteit en deskundigheid) en de documentatie-eisen (AS3) beïnvloeden naar verwachting zowel de flexibiliteit in de controleaanpak alsook de controlekosten.
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Jones, Keith L., Jagadison K. Aier, Duane M. Brandon, et al. "Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB Rulemaking Docket Matter 029: PCAOB Release No. 2011-007, Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits." Current Issues in Auditing 6, no. 1 (2012): C1—C6. http://dx.doi.org/10.2308/ciia-50133.
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SUMMARY In October 2011, the Public Company Accounting Oversight Board (PCAOB or Board) issued a release to solicit public comment on amendments to its standards that would improve the transparency of pubic company audits. The objective of the release was to solicit public comments on a proposed standard that would (1) require registered public accounting firms to disclose the name of the engagement partner in the audit report, (2) amend the Board's Annual Report Form to require registered firms to disclose the name of the engagement partner for each audit report already required to be reported on the form, and (3) require disclosure in the audit report of other independent public accounting firms and other persons that took part in the audit. The PCAOB provided for a 91-day exposure period (from October 11, 2011, to January 9, 2012) for interested parties to examine the release and provide comments. The Auditing Standards Committee of the Auditing Section of the American Accounting Association provided the comments in the letter below to the PCAOB on PCAOB Rulemaking Docket Matter 029: PCAOB Release No. 2011-007, Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits. Data Availability: Information about and access to the release is available at: http://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB_Release_2011-007.pdf
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Brazel, Joseph F., Paul Caster, Shawn Davis, et al. "Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB Rulemaking Docket Matter No. 34: PCAOB Release No. 2011-003, Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements." Current Issues in Auditing 5, no. 2 (2011): C1—C14. http://dx.doi.org/10.2308/ciia-50074.
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SUMMARY Recently, the Public Company Accounting Oversight Board (PCAOB or Board) issued a concept release to solicit public comment on the potential direction of a proposed standard-setting project on the content and form of reports on audited financial statements. The objective of the concept release was to discuss several alternatives for changing the auditor's reporting model that could increase its transparency and relevance to financial statement users, while not compromising audit quality. To that end, the alternatives included (1) a supplement to the auditor's report, in which the auditor would be required to provide additional information about the audit and the company's financial statements (an “Auditor's Discussion and Analysis”), (2) required and expanded use of emphasis paragraphs in the auditor's report, (3) auditor reporting on information outside the financial statements, and (4) clarification of certain language in the auditor's report. The PCAOB provided for a 102-day exposure period (from June 21 to September 30, 2011) for interested parties to examine and provide comments on the conceptual approaches to rulemaking that might complement the application of Section 105(c)(6). The Auditing Standards Committee of the Auditing Section of the American Accounting Association provided the comments in the letter below to the PCAOB on the PCAOB Release No. 2011-003, Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements. Data Availability: Information about and access to the release is available at: http://pcaobus.org/Rules/Rulemaking/Docket034/Concept_Release.pdf
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Thompson, James H., and Bart H. Ward. "Empirical Support for the PCAOB’s Elimination of the Independent Auditor’s Opinion Regarding Management’s Assessment of Internal Control." International Journal of Accounting and Financial Reporting 2, no. 1 (2012): 263. http://dx.doi.org/10.5296/ijafr.v2i1.1950.
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In an attempt to bolster public confidence in the accounting profession, the PCAOB issued several standards that were intended to address weaknesses in audit reporting and to increase public confidence in financial reporting. One of these standards, Auditing Standard No.2, added two opinions on an enterprise’s internal control to audit reporting requirements. This Standard was superseded by Auditing Standard No. 5, which eliminated one of these opinions. The purpose of this paper is to examine the efficacy of the elimination of the auditor’s opinion regarding management’s assessment of internal control. The data in this study were taken from 10-K reports filed by Fortune 500 Companies in 2004-2007. From the 10-K reports, copies of audit reports were gathered for 114 of the 120 largest companies and the opinions (unqualified, qualified, or adverse) were recorded.
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Doxey, Marcus M., Stephen H. Fuller, Marshall A. Geiger, et al. "Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Release No. 2016-003, Proposed Auditing Standard—The Auditor's Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards." Current Issues in Auditing 11, no. 1 (2016): C26—C40. http://dx.doi.org/10.2308/ciia-51651.
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SUMMARY On May 11, 2016 the Public Company Accounting Oversight Board (PCAOB) issued a request for comment on Proposed Auditing Standard—The Auditor's Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards, a reproposal of its August 2013 proposed auditor reporting standard. The reproposal retains the pass/fail model of the existing auditor's report while seeking to enhance the form and content of the report. The reproposal solicited public comment on the following significant changes to the existing auditor's report: (1) add a description of “critical audit matters” that provides audit-specific information about especially challenging, subjective, or complex aspects of the audit as they relate to the relevant financial statement accounts and disclosures, (2) add a statement about auditor independence and the phrase “whether due to error or fraud” when describing the auditor's responsibilities to obtain reasonable assurance about whether the financial statements are free of material misstatements, (3) add a statement related to auditor tenure, and (4) standardize the form of the auditor's report, requiring the opinion be the first section of the auditor's report and requiring section titles to guide the reader. The comment period ended on August 15, 2016. This commentary summarizes the participating committee members' views on the alternatives presented in the request for comment. Data Availability: The concept release, proposed and reproposed rules, and supplemental information are available at: http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx
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Martin, Roger D., Jay S. Rich, and T. Jeffrey Wilks. "Auditing Fair Value Measurements: A Synthesis of Relevant Research." Accounting Horizons 20, no. 3 (2006): 287–303. http://dx.doi.org/10.2308/acch.2006.20.3.287.
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To contribute to the PCAOB project on auditing fair value measurements (FVMs), we synthesize relevant academic literature to offer insights, conclusions, and future research directions for auditors, standard-setters, and academics focusing on auditing FVMs. We structure our synthesis along two dimensions: (1) an emphasis on the auditor's need to understand how FVMs are prepared, and (2) the audit steps and procedures necessary to verify and attest to FVMs, including an awareness of the potential biases inherent in auditing FVMs. Drawing primarily from the judgment and decision-making literature, we highlight a number of potential biases and limitations in the preparation and audit of FVMs. Additionally, we note that the specialized valuation knowledge necessary to effectively audit FVMs will be difficult for auditors to gain and maintain.
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Adhikari, Subash, Binod Guragai, and Ananth Seetharaman. "Market Response to Audited Internal Control Weakness Disclosures." Journal of Forensic Accounting Research 5, no. 1 (2020): 2–20. http://dx.doi.org/10.2308/jfar-19-016.
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ABSTRACT To help guard against weaknesses in internal control over financial reporting (ICFR), the Sarbanes-Oxley Act of 2002 requires certain filers to have their ICFR assertions audited. Beneish et al. (2008) show that market participants fail to react negatively to adverse ICFR audit opinions. This is puzzling because weak ICFR heightens the risk of fraud or materially misstated financial statements. Our study reexamines this issue for the time periods covered by Auditing Standard No. 2 (AS2) and Auditing Standard No. 5 (AS5). We too find no significant negative market reaction to the disclosure of adverse ICFR audits in the AS2 era. However, we show that markets react negatively for first-time disclosures of adverse ICFR audits after the adoption of AS5. Furthermore, in the AS5 regime, markets seem to differentiate between entity-wide versus account-specific ICFR weaknesses. We also show that correcting previous ineffective ICFR results in a positive market reaction. Data Availability: Data are available from sources cited in the text.
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Adhikari, Subash, Binod Guragai, and Ananth Seetharaman. "Market Response to Audited Internal Control Weakness Disclosures." Journal of Forensic Accounting Research 5, no. 1 (2020): 2–20. http://dx.doi.org/10.2308/jfar-19-016.
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ABSTRACT To help guard against weaknesses in internal control over financial reporting (ICFR), the Sarbanes-Oxley Act of 2002 requires certain filers to have their ICFR assertions audited. Beneish et al. (2008) show that market participants fail to react negatively to adverse ICFR audit opinions. This is puzzling because weak ICFR heightens the risk of fraud or materially misstated financial statements. Our study reexamines this issue for the time periods covered by Auditing Standard No. 2 (AS2) and Auditing Standard No. 5 (AS5). We too find no significant negative market reaction to the disclosure of adverse ICFR audits in the AS2 era. However, we show that markets react negatively for first-time disclosures of adverse ICFR audits after the adoption of AS5. Furthermore, in the AS5 regime, markets seem to differentiate between entity-wide versus account-specific ICFR weaknesses. We also show that correcting previous ineffective ICFR results in a positive market reaction. Data Availability: Data are available from sources cited in the text.
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Dey, R. Mithu, and Lucy Lim. "Audit fee trends from 2000 to 2014." American Journal of Business 33, no. 1/2 (2018): 61–80. http://dx.doi.org/10.1108/ajb-10-2016-0033.
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Purpose 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. Design/methodology/approach 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. Findings 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. Practical implications 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. Originality/value 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.
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Alali, Fatima, Randal Elder, and Jian Zhou. "An Analysis of Big 4 Pricing and Firm Size: The Differential Impact of Demand and Supply Shocks on Large and Small Clients." Journal of Accounting, Auditing & Finance 34, no. 2 (2017): 204–30. http://dx.doi.org/10.1177/0148558x17704555.
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We investigate Big 4 pricing over the period of 2000 to 2010. We classify the data into five periods: 2000-2001 as the pre-Sarbanes–Oxley Act (SOX) period, 2002-2003 as the SOX period, 2004-2006 as the Auditing Standard 2 (AS2) period, 2007 as the AS5 period, and 2008-2010 as the Great Recession period. The shocks to the audit market associated with these changes in auditing regulations and the economic environment have differential impacts on large clients and small clients. The percentage of small clients using Big 4 auditors dropped significantly over these shocks, whereas the percentage of large clients using Big 4 auditors experienced a large drop only from the SOX period to the AS2 period. We find that Big 4 pricing increased significantly from the pre-SOX period to the SOX period and continued to increase significantly in the AS2 period. Big 4 pricing experienced a significant decline in the AS5 period and declined insignificantly in the Great Recession period. Big 4 small firm pricing decreased significantly in the AS2 period compared with the SOX period and in the Great Recession period compared with the AS5 period. We find that the Big 4 pricing for small clients is contingent on the nature of competition. The Big 4 charged small firms higher prices in the SOX period, AS5 period, and Great Recession period when competition was lower. Our paper provides a unique contribution as a comprehensive analysis of Big 4 pricing and Big 4 small firm pricing.
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Raghunandan, K., and Dasaratha V. Rama. "SOX Section 404 Material Weakness Disclosures and Audit Fees." AUDITING: A Journal of Practice & Theory 25, no. 1 (2006): 99–114. http://dx.doi.org/10.2308/aud.2006.25.1.99.
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Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2 (PCAOB 2004) require management and the auditor to report on internal controls over financial reporting. Section 404 is arguably the most controversial element of SOX, and much of the debate around the costs of implementing section 404 has focused on auditors' fees (Ernst & Young 2005). In this paper, we examine the association between audit fees and internal control disclosures made pursuant to section 404. Our sample includes 660 manufacturing firms that have a December 31, 2004 fiscal year-end and filed the section 404 report by May 15, 2005. We find that the mean (median) audit fees for the firms in our sample for fiscal 2004 is 86 (128) percent higher than the corresponding fees for fiscal 2003. Audit fees for fiscal 2004 are 43 percent higher for clients with a material weakness disclosure compared to clients without such disclosure; however, audit fees for fiscal 2003 are not associated with an internal control material weakness disclosure (in the 10-K filed following fiscal 2004). We also find that the association between audit fees and the presence of a material weakness disclosure does not vary depending on the type of material weakness (systemic or non-systemic).
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Fuller, Stephen H., Jennifer R. Joe, and Benjamin L. Luippold. "The Effect of Auditor Reporting Choice and Audit Committee Oversight on Management Financial Disclosures." Accounting Review, March 24, 2021. http://dx.doi.org/10.2308/tar-2016-0246.
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We investigate the joint effects of auditor's reporting choice and audit committee effectiveness on management disclosures about complex estimates. A new PCAOB standard requires auditors to report on Critical Audit Matters (CAMs): issues "communicated or required to be communicated to the audit committee" about accounts or disclosures that (1) "are material to the financial statements" and (2) "involved especially challenging, subjective, or complex auditor judgment" (PCAOB 2017a, 11). Consistent with investor arguments, we find that audit committee effectiveness and more detailed CAM reporting encourage managers' disclosures of the risk underlying complex estimates. When the auditor's report is more informative about a complex estimate and the audit committee is more effective, management's related financial disclosures are more forthcoming. However, less informative auditor disclosures or more effective audit committees alone do not prompt greater management disclosure. Thus, expanded auditor reporting and more effective audit committees, together, can enhance the disclosures investors value.