The PCAOB’s Role in Audit Conduct and Conscience
John D. Keyser, Case Western Reserve University
The mission of the Public Company Accounting Oversight Board (referred to herein as the PCAOB or the Board) is to protect investors and further the public interest. In this article, the regulatory approach of the PCAOB is contrasted with the Securities and Exchange Commission (SEC) in the context of the “capture” and “public interest” models of regulatory behavior. After the WorldCom fraud, Congress could have stripped the CPA profession of its auditing franchise, but it chose to take a less drastic measure. The independent public accountants retained their audit franchise, but with a new regulator to augment their conscience. The approach is consistent with the SEC strategy in that the auditor continues to fulfill an important role in the financial reporting supply chain. The article discusses the ways in which it appears that the drafters of SOX attempted to infuse the Board with the qualities that have made the SEC so successful. While SOX was prescriptive in many areas, it also imparted a significant degree of discretion to the Board. The article analyzes how the Board has used the discretion granted to it by SOX in ways that are either consistent or inconsistent with the SEC model. Although the PCAOB was structured very similarly to the SEC, the Board has exercised its discretion in ways that appear to deviate from the SEC strategy. The decision to name itself as the auditing standard-setter is an example of the departure from the SEC’s own strategy.
Keywords: Capture, PCAOB, Public Interest Responsibility, Sarbanes-Oxley Act, Standard-setting
SOX and bondholders’ reliance on monitors
Qiuhong Zhao, Texas A&M University – Corpus Christi; David A. Ziebart, University of Kentucky
This work investigate the changes in the market participants’ reliance on five types of monitors/monitoring mechanisms (auditors, corporate governance, equity analysts, credit analysts, and banks) after the implementation of the Sarbanes-Oxley Act (SOX). By focusing on changes in weights associated with the monitoring mechanisms across implementation of SOX, the results indicate that bondholders appear to rely more on the monitoring of equity analysts, the audit committee, and lenders, and less on auditors and credit rating agencies. Importantly, the results indicate that SOX reduced the bond yield interest spread. However, while SOX may have strengthened the debt market’s reliance on some monitoring mechanisms, it seems to have weakened the debt market’s reliance on other monitoring mechanisms some might have assumed should have been strengthened by SOX. There are three possible explanations for the finding that SOX’s extensive reform in auditing has not increased bondholders’ reliance on auditors. One explanation is that it may take a longer time for investors to value the effectiveness of this monitoring mechanism after the implementation of SOX and this impact is beyond the post-SOX period analyzed. An alternative explanation is that SOX may not solve the real problems underlying the massive corporate failures. The third explanation is the potential substitution effects of the other monitoring mechanisms.
Keywords: Sarbanes-Oxley Act; Monitors; Bondholders’ reliance
The Legacy of Robert Kuhn Mautz (1915 – 2002)
Jill R. Cadotte, Case Western Reserve University
Robert K. Mautz’s work has influenced the accounting and auditing profession for decades. The Philosophy of Auditing and his support of applied research affords us a legacy for contemporary contemplation in research, education, and professional practice. He served on numerous committees and commissions, providing a model of service and integrity worthy of recognition.
Understanding the Evolution of SFAS 141 and 142: An analysis of comment letters
Divya Anantharaman, Rutgers University
This study analyzes the evolution of the Financial Accounting Standards Board (FASB)’s Statement of Financial Accounting Standards (SFAS) 141 and 142, through a detailed analysis of comment letters submitted to the FASB on Business Combinations Exposure Drafts 201 and 201 (Revised). Comment letters, an integral part of the standard-setting process, contain valuable insights on the views of parties affected by FASB’s pronouncements - issuers, professional accountants and auditors, securities analysts, and others. The content analysis indicates that a majority of corporate respondents opposed the abolition of the pooling-of-interests method, not on theoretical grounds, but on the grounds that abolishing pooling would bring adverse economic consequences to their firms and industries. Letters also show strong differences in views across various groups of respondents. On the question of how goodwill should be treated once recognized, the amortization-with-impairment approach garnered significantly more support from the entire pool of respondents than the impairment-only approach, and the dominant view amongst most respondents, particularly audit firms, was that an impairment-only approach would not be reliable enough to be feasible in practice. These views are in sharp contrast to the FASB’s eventual adoption of the impairment-only approach in SFAS 142 Goodwill and Other Intangible Assets, which suggests that the evolution of this standard was subject to forces not fully evident from, or reflected in, the comment letter process.
Keywords: SFAS 141 & 142, Business combinations, Goodwill impairment, Comment letters, Standard-setting.
The Effect of SEC Approval of Social Media for Information Dissemination
Jack W. Dorminey, West Virginia University; Richard B. Dull, West Virginia University; Ludwig Christian Schaupp, West Virginia University
In April 2013, the SEC provided explicit guidance to public companies regarding social media use for material disclosures. This paper examines the effect of regulatory approval on the market reaction to financial disclosures distributed by firms via social media. The use of social media to disseminate information may lead to broader market interest in the stock. Social media use by firms is explored in three time periods: (1) prior to public SEC scrutiny of social media, (2) after the SEC filed a formal complaint about the use of social media, and (3) after the April 2013 guidance. The analysis demonstrates a positive association between social media use and market reaction as evidenced in trading volume. Second, the association between social media use by firms and trading volume is greatest following the SEC’s guidance. Third, social media is used more extensively by disclosing firms in the period following explicit SEC guidance permitting its use.
Keywords: Regulation FD, Securities and Exchange Commission, Social media, Trading volume
Contingency Liabilities: The Effect of Three Alternative Reporting Styles
Bruce Lagrange, Université du Québec à Rimouski; Chantal Viger, Université du Québec à Montréal; Asokan Anandarajan, New Jersey Institute of Technology
The International Accounting Standards Board’s (IASB) new international financial reporting standards (IFRS) relating to contingencies became effective on January 1, 2011, officially replacing the CICA’s (Canadian Institute of Chartered Accountants) contingent liability accounting standards for publicly accountable enterprises. Although both sets of standards (IFRS and CICA) are based on fundamentally similar conceptual frameworks, they differ significantly in certain respects. This study examines the changes now required in contingency reporting and their implications for regulators. Rules for contingency reporting were previously dictated by Canadian GAAP (CGAAP), as formulated by the Canadian Institute of Chartered Accountants, but are now subject to the IASB’s IAS 37. However, to enhance clarity and ease of understanding for financial statement users, the IASB has proposed a new version of contingent liability accounting standards under IFRS, titled exposure draft IAS 37. The message conveyed by the three different types of reporting is investigated, with findings that have implications for other similar rules adopted by IASB. Results indicate variations in four types of judgments by the Canadian loan officers in the experiment. Although their loan granting decisions were not influenced by the change to IASB’s IAS 37, the officers charged significantly different interest premiums according to the type of financial statement received, i.e. based on former Canadian requirements, the original IAS 37 or the proposed IAS 37 exposure draft. Loan officers’ judgments are therefore influenced by the way contingent liabilities are presented, a finding that has implications for regulators, mainly in view of the fact that the proposed IAS 37 reporting style could facilitate clarity and understanding of these liabilities.
Keywords: Contingent liabilities; IAS 37, exposure draft IAS 37; IFRS; International Accounting Standards Board.
Developments in Accounting Regulation: A Synthesis and Annotated Bibliography of Evidence and Commentary in the 2013 Academic Literature
Laurel Franzen, Loyola Marymount University; Michele Meckfessel, University of Missouri – St. Louis; Stephen R. Moehrle, University of Missouri – St. Louis; Jennifer A. Reynolds-Moehrle, University of Missouri – St. Louis
In this article, we synthesize in annotated bibliography form, recent regulation-related findings and commentaries in the academic literature. This annotated bibliography is one in a series of bibliographies that summarizes regulation-related academic research. We reviewed articles published in The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Contemporary Accounting Research, Accounting Horizons, The Journal of Accounting, Auditing & Finance, Journal of Accounting and Public Policy, Journal of Business, Finance & Accounting, Auditing: A Journal of Practice and Theory, and Research in Accounting Regulation. We annotate results of regulation-related research studies and key points from regulation-related commentaries. The literature featured some strong regulation-related threads in 2013 including the foundations of financial reporting, the role of financial reporting in the financial crisis, accounting disclosure, financial reporting choices, international financial reporting standards, and Sarbanes-Oxley and its impact on accounting and audit quality.
Keywords: Accounting, Financial Reporting, Auditing, Sarbanes-Oxley, Financial Crisis, International Financial Reporting Standards, Regulation, Research
The SOX 404 Internal Control Audit: Key Regulatory Events
Chan Li, University of Pittsburgh; K. K. Raman, University of Texas at San Antonio; Lili Sun, University of North Texas; Da Wu, University of North Texas
Section 404b of the 2002 Sarbanes Oxley Act (SOX) requires auditors to attest to the effectiveness of a client’s internal control over financial reporting (ICFR). In this paper, we provide an overview of key regulatory events in the implementation of the 404 internal control audit. We discuss the early years (under Auditing Standard No. 2) as well as the later years (under Auditing Standard No. 5) of the 404 audit, emphasizing areas of improvement in the efficiency and effectiveness of the audit as well as the remaining problems and challenges highlighted in PCAOB inspection reports and practice alerts. Finally, we address recent regulatory developments pertinent to the 404 audit such as Auditing Standard No. 12 and the recent 2013 update to the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) internal control framework.
Keywords: SOX 404 audit; internal control; AS2; AS5; PCAOB.
A 1904 Episode in Self-Regulation: Arthur Lowes Dickinson and the Development of the Income Statement
Mary B. Sasmaz, Case Western Reserve University
This paper explores the impact that Sir Arthur Lowes Dickinson, inducted into the Accounting Hall of Fame in 1951, had on accounting thought in the United States. Throughout his career, Dickinson focused on improving the accounting profession, both internally and externally, through speeches, writing, and example. This paper takes particular focus of Dickinson’s 1904 “Profits of a Corporation” paper, his influence on governing bodies such as the Federal Reserve, and the long-term impact of his contribution to the current accounting profession and practice.
For Better or Worse: A Study of Auditors’ Practices Under Auditing Standard No. 7
Denise Dickins, East Carolina University; Rebecca Fay, East Carolina University; Brain Daugherty, University of Wisconsin - Milwaukee
The PCAOB’s Auditing Standard No. 7 (AS No. 7) revised guidance for Engagement Quality Reviews (EQRs). To better understand the impact of resulting changes in practice, if any, that have occurred in the nature, extent, and timing of the EQR process, and the impact of such changes on audit quality, we surveyed practicing audit partners familiar with EQRs. Results indicate that AS No. 7 changed the nature of EQRs by impacting the role and approach of the EQ Reviewer. It impacted the extent of procedures performed by the EQ Reviewer and altered communications between the EQ Reviewer and most engagement team members, but it had little impact on the timing of EQRs. Collectively, results suggest AS No. 7 changed EQRs, but such changes may not have improved audit quality. These findings provide insight to the continuing conclusion of the PCAOB that many EQ Reviewers do not fulfill their role of monitoring audit quality, and are also suggestive of opportunities to improve the EQR process.
Keywords: Engagement Quality Review, Auditing Standard No. 7, Audit Quality
“A Toast From the Kids”
Jim Peterson, Esq.
The adult children of an elderly widow celebrate her decision to re-marry at age 85 – not least, for the meticulous attention and care given by the newlyweds to their business, financial and household affairs – a demonstration of responsibility that provides confidence in their well-bring and relieves the younger generation of worry and anxiety.
Accounting Changes: Chronicles of Convergence, Crisis and Complexity in Financial Reporting. Robert H. Herz. AICPA, Durham, NC, 2013. 268 pages; paperback available on Amazon, $11.95.
Robert H. Colson, City University of New York
This review covers a book authored by the former chair of the Financial Accounting Standards Board (FASB), Robert Herz. His years in office, the accomplishments achieved, and events that transpired during the time are all chronicled. Herz provides numerous insights into his thinking and the FASB decision processes as they relate to accounting standard setting. In addition to his time as the chair of the FASB, Herz had also been a part-time member of the International Accounting Standards Board (IASB). With this background, Herz provided invaluable insight into the convergence efforts of U.S. GAAP and IASB. A number of structural changes occurred during Herz’s tenure including a change to the appointment process for FAF board members in order to “engage additional public members”. Herz’s book illustrates these developments and includes an assessment of the resulting consequences.
Keywords: Financial Accounting Standards Board, Standard-Setting, Convergence, International Accounting Standards Board