An Analysis of SEC and PCAOB Enforcement Actions against Engagement Quality Reviewers

Messier, William F.; Kozloski, Thomas M.; Kochetova-Kozloski, Natalia

doi:10.2308/aud.2010.29.2.233

Cited by 44 publications

(31 citation statements)

References 10 publications

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“…From a regulatory perspective, audit quality (or the lack of it) is measured by the quantity, nature, and magnitude of audit process deficiencies identified through the AICPA Peer Review Program, SEC investigations, and PCAOB inspections, and attributed to the failure to exercise professional skepticism or due professional care (e.g., Beasley et al 2001;Houston 2008, 2009;Hermanson et al 2007Hermanson et al , 2010Landis et al 2011;Louwers et al 2008;Messier et al 2010;PCAOB 2007PCAOB , 2008Roybark 2006). Both approaches have their limitations.…”

Section: Audit Quality: Fact Versus Perceptionmentioning

confidence: 97%

Mandatory Disclosure of the Engagement Partner's Identity: Potential Benefits and Unintended Consequences

King

Davis

Mintchik

2012

Accounting Horizons

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SYNOPSIS: This paper contributes to the deliberations on the potential consequences of requiring disclosure of the engagement partner's identity in the audit report. The PCAOB has recently suggested that this requirement will lead to enhanced audit quality due to increased engagement partner accountability and improved transparency of the audit process. The goal of our commentary is to examine this issue by considering factors that potentially affect audit quality in appearance and audit quality in fact, and applying insights from three distinct academic frameworks: source credibility, accountability, and the theory of affordances.While prior evidence from source credibility research implies that a mandatory signature will likely increase audit quality in appearance, its impact on audit quality in fact remains unclear. Academic literature suggests that increased accountability will increase audit effort but is silent on the associated increase in audit effectiveness. As a result, mandatory disclosure is likely to increase the risk of over-auditing because audit services have the essential characteristics of a credence good. As for an increase in audit quality in appearance, the question remains whether the current perception of audit quality is too low or too high. The increase in public perceptions of audit quality without an associated increase in actual quality is a desirable accomplishment only when public perception of quality is below actual audit quality. Otherwise, the measure increases the gap between delivered audit quality and public perceptions of it. We suggest specific research opportunities in this area.information users seek greater transparency about information source due to a legitimate desire to decrease uncertainty associated with information evaluation. The implication as applied to auditing is that disclosure of the engagement partner's identity will likely increase audit quality in appearance, as well as public confidence in the message content (audit report and associated financial statements). At the same time, greater transparency tempts decision makers to decrease cognitive effort and to rely mostly on the sender's attributes during information processing. The implications are that identifying the EP has the potential to increase the likelihood that investors will place unwarranted weight on the EP's characteristics and underweight the content of the audited financial statements. AccountabilityThis framework, which originated in social psychology, suggests that the positive impact of increased accountability is limited to problems caused by lack of effort rather than by lack of expertise or resources. Accountability-related studies also warn about decision makers' tendency to succumb to the audience's preferences by decreasing effort and independent data processing when reporting to an audience with known views. In an audit context, such a tendency will likely lead to more conservative risk-related judgments and expansive audit procedures, increasing audit costs, but not necessarily au...

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Section: Audit Quality: Fact Versus Perceptionmentioning

confidence: 97%

Mandatory Disclosure of the Engagement Partner's Identity: Potential Benefits and Unintended Consequences

King

Davis

Mintchik

2012

Accounting Horizons

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“…Very little research investigates audit enforcement when the audit firm or auditor violate the accounting or auditing standards. In this context, we aim to extend Church and Shefchik (2012) and Messier et al (2010). We answer the call of Church and Shefchik (2012) for further research to expand knowledge on audit enforcement effects.…”

Section: Hypothesesmentioning

confidence: 97%

“…Results show that most of deficiencies (88.6 percent) are not severe because they do not result in a misstatement. Messier et al (2010), analyzing SEC and PCAOB enforcement actions against engagement quality reviewers, find that most of the sanctions do not involve Big4, and involve sanctions as a result of violation of auditing and accounting standards, including the lack of understanding of internal control. Most of them are significant sanctions, with prohibition of practicing for three or more years.…”

Section: Hypothesesmentioning

confidence: 99%

Determinants of Audit Sanctions Severity

Azzali

2020

IJBA

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This study investigates the effects of material weaknesses from auditing standards and of material misstatement from accounting standards on the audit sanctions severity. Using a unique database in the period 1983 -2015, we find mixed results. Among the auditing standards, Internal Control Weaknesses lead to more severe audit sanctions than Quality Control, Other Auditors, Reporting and Audit Opinion Material Weaknesses Audit Sanctions, and to less severe audit sanctions than Professional Skepticism and Substantial Procedures. Among accounting standards, Fair Value misstatements are associated with more severe audit sanctions than Long-term investment, bank debts, and liquidity errors, and with lower severity of audit sanctions than Account receivables. Taken together, these findings suggest two main determinants of audit sanctions severity that auditors and accountants need to be aware: the area of internal control deficiencies and the area of fair value measurement. From these results, we learn that accounting and auditing standards errors have different likelihood of audit sanctions, and that auditors that aim to avoid sanctions need to invest mainly in the internal control assurance and in the fair value items of the financial reporting.

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“…The only component of the audit risk model under the control of the auditor is detection risk, which is defined as the risk that audit procedures will not detect and correct a material misstatement. To reduce detection risk, and thereby increase the likelihood that they will identify a material misstatement, the auditors need to perform additional substantive tests (Messier, Kozloski, & Kochetova‐Kozloski, ), thereby increasing audit costs (Simunic, ).…”

Section: Literature Review and Development Of The Hypothesesmentioning

confidence: 99%

“Problem” directors and audit fees

2019

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This study investigates the association between audit fees and the presence of “problem” directors on corporate boards and audit committees. “Problem” directors, in this context, are those directors who have been involved in corporate financial failures and integrity indiscretions in the past. Auditors regard the presence of such directors on boards and audit committees as audit risk, and may have to enhance their audit procedures, leading to higher audit fees. Using a sample of 9,175 firm‐year observations from 2004 to 2010 of US firms, we find that the presence of “problem” directors on boards and audit committees is associated with higher audit fees. This finding has a policy implication for corporate managers, that they should be mindful of the increase in perceived audit risk that arises from professional and personal attributes of directors when recruiting individuals to serve on their boards.

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An Analysis of SEC and PCAOB Enforcement Actions against Engagement Quality Reviewers

Cited by 44 publications

References 10 publications

Mandatory Disclosure of the Engagement Partner's Identity: Potential Benefits and Unintended Consequences

Mandatory Disclosure of the Engagement Partner's Identity: Potential Benefits and Unintended Consequences

Determinants of Audit Sanctions Severity

“Problem” directors and audit fees

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