C. Boland, Matthew S. Ege, Noel Harding, D. Hermanson, Kyleen W. Prewett, Jonathan S. Pyzoha
On November 18, 2022, the Public Company Accounting Oversight Board (the Board or PCAOB) issued a request for comment on its proposed quality control standard, A Firm’s System of Quality Control and Other Proposed Amendments to PCAOB Standards, Rules, and Forms (Public Company Accounting Oversight Board (PCAOB) 2022). This commentary summarizes the participating committee members’ views on (1) the overall standard and selected questions and (2) recent research that we encourage the PCAOB to consider.
{"title":"Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB’s A Firm’s System of Quality Control and Other Proposed Amendments to PCAOB Standards, Rules, and Forms","authors":"C. Boland, Matthew S. Ege, Noel Harding, D. Hermanson, Kyleen W. Prewett, Jonathan S. Pyzoha","doi":"10.2308/ciia-2023-005","DOIUrl":"https://doi.org/10.2308/ciia-2023-005","url":null,"abstract":"\u0000 On November 18, 2022, the Public Company Accounting Oversight Board (the Board or PCAOB) issued a request for comment on its proposed quality control standard, A Firm’s System of Quality Control and Other Proposed Amendments to PCAOB Standards, Rules, and Forms (Public Company Accounting Oversight Board (PCAOB) 2022). This commentary summarizes the participating committee members’ views on (1) the overall standard and selected questions and (2) recent research that we encourage the PCAOB to consider.","PeriodicalId":44019,"journal":{"name":"Current Issues in Auditing","volume":" ","pages":""},"PeriodicalIF":0.8,"publicationDate":"2023-06-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45407744","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The value of PCAOB enforcement was questioned in a 2019 Project on Government Oversight report, calling it a “toothless body of law.” However, the argument focused narrowly on the limited number of PCAOB enforcements imposed on Big 4 auditors without consideration of whether they motivate positive audit quality effects more broadly. In this paper, we summarize key findings by Lamoreaux, Mowchan, and Zhang (2023) regarding whether PCAOB enforcement provides spillover benefits, deterring audit failures. LMZ find audit quality improvements among nonsanctioned auditors following PCAOB enforcement, but the pattern of this spillover varies with auditor and enforcement characteristics. Their results suggest that even PCAOB enforcements that seem limited in scope can offer protections to investors more broadly through spillover benefits. In conclusion, we discuss potential avenues through which additional spillover benefits could occur, resulting from audit firm organizational structures, remote work environments, and emerging trends in PCAOB rule-making and enforcement. JEL Classifications: G38; M42; M48.
{"title":"PCAOB Enforcement: Toothless Body of Law or a Bite That Packs a Punch?","authors":"Michael J. Mowchan, Wei Zhang","doi":"10.2308/ciia-2022-038","DOIUrl":"https://doi.org/10.2308/ciia-2022-038","url":null,"abstract":"\u0000 The value of PCAOB enforcement was questioned in a 2019 Project on Government Oversight report, calling it a “toothless body of law.” However, the argument focused narrowly on the limited number of PCAOB enforcements imposed on Big 4 auditors without consideration of whether they motivate positive audit quality effects more broadly. In this paper, we summarize key findings by Lamoreaux, Mowchan, and Zhang (2023) regarding whether PCAOB enforcement provides spillover benefits, deterring audit failures. LMZ find audit quality improvements among nonsanctioned auditors following PCAOB enforcement, but the pattern of this spillover varies with auditor and enforcement characteristics. Their results suggest that even PCAOB enforcements that seem limited in scope can offer protections to investors more broadly through spillover benefits. In conclusion, we discuss potential avenues through which additional spillover benefits could occur, resulting from audit firm organizational structures, remote work environments, and emerging trends in PCAOB rule-making and enforcement.\u0000 JEL Classifications: G38; M42; M48.","PeriodicalId":44019,"journal":{"name":"Current Issues in Auditing","volume":" ","pages":""},"PeriodicalIF":0.8,"publicationDate":"2023-05-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49006481","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Current Issues in Auditing: A Foundation for ESG Research","authors":"Denise Dickins, Keith Urtel","doi":"10.2308/ciia-2023-003","DOIUrl":"https://doi.org/10.2308/ciia-2023-003","url":null,"abstract":"","PeriodicalId":44019,"journal":{"name":"Current Issues in Auditing","volume":" ","pages":""},"PeriodicalIF":0.8,"publicationDate":"2023-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43404830","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Michele Frank, Jonathan Grenier, Jonathan S. Pyzoha, Natalie Zielinski
SUMMARY According to the World Economic Forum (WEF) (2022), cybersecurity risk is the most immediate and financially material sustainability risk that organizations face. Companies experience significant financial and reputational losses in the market after a cyberattack. However, companies are only required to disclose a trivial amount of information about their cybersecurity risk management efforts (SEC 2014; Newman 2018). This paper summarizes Frank, Grenier, and Pyzoha (2019), which examines whether voluntarily providing additional disclosures regarding a company’s cybersecurity efforts, with or without assurance, increases investment attractiveness. Absent assurance, voluntary disclosures about the nature and effectiveness of cybersecurity efforts are sufficient to increase investment attractiveness for companies that have not (versus have) disclosed a prior cyberattack, as investors are less likely to question the disclosure’s reliability. Assurance provides a greater benefit to companies that have (versus have not) disclosed a prior cyberattack, as they benefit more from the reliability enhancement of assurance.
{"title":"Implications of Enhanced Cybersecurity Risk Management Reporting and Independent Assurance","authors":"Michele Frank, Jonathan Grenier, Jonathan S. Pyzoha, Natalie Zielinski","doi":"10.2308/ciia-2022-018","DOIUrl":"https://doi.org/10.2308/ciia-2022-018","url":null,"abstract":"SUMMARY According to the World Economic Forum (WEF) (2022), cybersecurity risk is the most immediate and financially material sustainability risk that organizations face. Companies experience significant financial and reputational losses in the market after a cyberattack. However, companies are only required to disclose a trivial amount of information about their cybersecurity risk management efforts (SEC 2014; Newman 2018). This paper summarizes Frank, Grenier, and Pyzoha (2019), which examines whether voluntarily providing additional disclosures regarding a company’s cybersecurity efforts, with or without assurance, increases investment attractiveness. Absent assurance, voluntary disclosures about the nature and effectiveness of cybersecurity efforts are sufficient to increase investment attractiveness for companies that have not (versus have) disclosed a prior cyberattack, as investors are less likely to question the disclosure’s reliability. Assurance provides a greater benefit to companies that have (versus have not) disclosed a prior cyberattack, as they benefit more from the reliability enhancement of assurance.","PeriodicalId":44019,"journal":{"name":"Current Issues in Auditing","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136261426","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
SUMMARY This study examines whether management’s corporate social responsibility (CSR) motives and CSR assurance influence jurors’ negligence and punitive damages assessments using a 2 × 2 experiment. CSR activities can provide insurance-like protection from negative reactions during a corporate crisis if stakeholders perceive altruistic motives. However, it is not known whether this insurance-like protection applies during litigation. Findings suggest that disclosure of altruistic CSR activities (i.e., without expectation of financial returns) improves jurors’ affective response to the defendant and perceptions of company behavior prior to a negative event compared to self-serving CSR activities (i.e., expectation of financial returns), which reduce negligence and punitive damages assessments. However, when disclosures are assured, the relationship changes. In this scenario, altruistic and self-serving CSR have similar influences on jurors’ judgments. Overall, results suggest that CSR disclosure and assurance may provide benefits during litigation by increasing jurors’ affective reaction to the defendant and perceptions of the company’s behavior.
{"title":"The Influence of Corporate Social Responsibility Disclosures and Assurance on Jurors’ Judgments","authors":"Andrew C. Stuart","doi":"10.2308/ciia-2022-020","DOIUrl":"https://doi.org/10.2308/ciia-2022-020","url":null,"abstract":"SUMMARY This study examines whether management’s corporate social responsibility (CSR) motives and CSR assurance influence jurors’ negligence and punitive damages assessments using a 2 × 2 experiment. CSR activities can provide insurance-like protection from negative reactions during a corporate crisis if stakeholders perceive altruistic motives. However, it is not known whether this insurance-like protection applies during litigation. Findings suggest that disclosure of altruistic CSR activities (i.e., without expectation of financial returns) improves jurors’ affective response to the defendant and perceptions of company behavior prior to a negative event compared to self-serving CSR activities (i.e., expectation of financial returns), which reduce negligence and punitive damages assessments. However, when disclosures are assured, the relationship changes. In this scenario, altruistic and self-serving CSR have similar influences on jurors’ judgments. Overall, results suggest that CSR disclosure and assurance may provide benefits during litigation by increasing jurors’ affective reaction to the defendant and perceptions of the company’s behavior.","PeriodicalId":44019,"journal":{"name":"Current Issues in Auditing","volume":"265 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136085530","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-04-01DOI: 10.2308/1936-1270-17.1.i
{"title":"Covers and Front Matter","authors":"","doi":"10.2308/1936-1270-17.1.i","DOIUrl":"https://doi.org/10.2308/1936-1270-17.1.i","url":null,"abstract":"","PeriodicalId":44019,"journal":{"name":"Current Issues in Auditing","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135519229","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, we provide a practitioner summary of our paper “Error or Fraud? The Effect of Omissions on Management’s Fraud Strategies and Auditors’ Evaluations of Identified Misstatements” (Hamilton and Smith 2021). In that study, we investigated (1) whether managers employ an “omission strategy” to reduce the perceived intentionality of their fraudulent misstatements and (2) whether auditors are prone to believe that such omissions are unintentional. We found that managers choose to perpetrate fraud by omitting transactions from the financial statements and by omitting critical information from supporting documents, rather than using more active forms of fraud (e.g., providing false information). We also found that auditors are less skeptical of misstatements when they involve omission, as opposed to more active forms of misrepresentation. Overall, our study identifies a concerning pattern, wherein the method of fraud chosen by managers—omission—is unlikely to be judged as intentional by auditors.
{"title":"Managers’ Use of an Omission Strategy to Perpetrate Fraud and Auditors’ Evaluations of the Resulting Misstatements","authors":"E. Hamilton, Jason L. Smith","doi":"10.2308/ciia-2022-032","DOIUrl":"https://doi.org/10.2308/ciia-2022-032","url":null,"abstract":"\u0000 In this article, we provide a practitioner summary of our paper “Error or Fraud? The Effect of Omissions on Management’s Fraud Strategies and Auditors’ Evaluations of Identified Misstatements” (Hamilton and Smith 2021). In that study, we investigated (1) whether managers employ an “omission strategy” to reduce the perceived intentionality of their fraudulent misstatements and (2) whether auditors are prone to believe that such omissions are unintentional. We found that managers choose to perpetrate fraud by omitting transactions from the financial statements and by omitting critical information from supporting documents, rather than using more active forms of fraud (e.g., providing false information). We also found that auditors are less skeptical of misstatements when they involve omission, as opposed to more active forms of misrepresentation. Overall, our study identifies a concerning pattern, wherein the method of fraud chosen by managers—omission—is unlikely to be judged as intentional by auditors.","PeriodicalId":44019,"journal":{"name":"Current Issues in Auditing","volume":" ","pages":""},"PeriodicalIF":0.8,"publicationDate":"2023-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45513967","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Sean G. Fingland, Jeffrey S. Pickerd, M. D. Piercey
Research suggests that the amount of inherent uncertainty in contemporary accounting estimates has increased in recent years, potentially increasing audit litigation risk. We review a recent study that finds that high estimate uncertainty impacts auditor litigation risk in opposite directions, depending on whether the litigation is decided in a jury trial or settled by attorneys out of court. Mock jurors and attorneys specialized in corporate and securities law read the same case about an alleged undetected material misstatement, with jurors judging auditor negligence and attorneys planning proposed out-of-court settlement negotiations on behalf of auditors. Results show that, under common conditions, mock jurors found auditors less negligent when estimate uncertainty was high. However, attorneys predicted the mock jurors to find auditors more negligent when estimate uncertainty was high, leading them to concede more on behalf of auditors in their proposed settlements.
{"title":"How Does High Uncertainty in Accounting Estimates Impact Auditor Litigation Risk? Opposite Effects in Jury Trials and Attorneys’ Out-of-Court Settlements","authors":"Sean G. Fingland, Jeffrey S. Pickerd, M. D. Piercey","doi":"10.2308/ciia-2022-021","DOIUrl":"https://doi.org/10.2308/ciia-2022-021","url":null,"abstract":"\u0000 Research suggests that the amount of inherent uncertainty in contemporary accounting estimates has increased in recent years, potentially increasing audit litigation risk. We review a recent study that finds that high estimate uncertainty impacts auditor litigation risk in opposite directions, depending on whether the litigation is decided in a jury trial or settled by attorneys out of court. Mock jurors and attorneys specialized in corporate and securities law read the same case about an alleged undetected material misstatement, with jurors judging auditor negligence and attorneys planning proposed out-of-court settlement negotiations on behalf of auditors. Results show that, under common conditions, mock jurors found auditors less negligent when estimate uncertainty was high. However, attorneys predicted the mock jurors to find auditors more negligent when estimate uncertainty was high, leading them to concede more on behalf of auditors in their proposed settlements.","PeriodicalId":44019,"journal":{"name":"Current Issues in Auditing","volume":" ","pages":""},"PeriodicalIF":0.8,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46702688","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jonathan A. Milian, K. Raghunandan, Vanessa Vandamas
The Public Company Accounting Oversight Board has required audit reports to include information about auditor tenure for fiscal years ending on or after December 15, 2017. Tanyi, Rama, and Raghunandan (2021) examine the impact of this requirement on shareholder ratification voting of auditors. Consistent with shareholders sharing the oft-expressed views of legislators and regulators that long auditor tenure may impair auditor independence and audit quality, they find that shareholder opposition to auditor ratification increases (decreases) for long-tenured (short-tenured) auditors after the tenure disclosure. Thus, the very act of public disclosure in the audit report appears to have impacted investors’ voting decisions. The results suggest that auditors should respond to the increased scrutiny of auditor tenure by pro-actively engaging with the audit committees of their long-tenured clients. The results are also relevant in the context of the SEC’s efforts to have such tenure disclosure requirements in registrants’ proxy statements.
{"title":"Does Auditor Tenure Disclosure Affect Shareholder Ratification Voting?","authors":"Jonathan A. Milian, K. Raghunandan, Vanessa Vandamas","doi":"10.2308/ciia-2022-035","DOIUrl":"https://doi.org/10.2308/ciia-2022-035","url":null,"abstract":"The Public Company Accounting Oversight Board has required audit reports to include information about auditor tenure for fiscal years ending on or after December 15, 2017. Tanyi, Rama, and Raghunandan (2021) examine the impact of this requirement on shareholder ratification voting of auditors. Consistent with shareholders sharing the oft-expressed views of legislators and regulators that long auditor tenure may impair auditor independence and audit quality, they find that shareholder opposition to auditor ratification increases (decreases) for long-tenured (short-tenured) auditors after the tenure disclosure. Thus, the very act of public disclosure in the audit report appears to have impacted investors’ voting decisions. The results suggest that auditors should respond to the increased scrutiny of auditor tenure by pro-actively engaging with the audit committees of their long-tenured clients. The results are also relevant in the context of the SEC’s efforts to have such tenure disclosure requirements in registrants’ proxy statements.","PeriodicalId":44019,"journal":{"name":"Current Issues in Auditing","volume":" ","pages":""},"PeriodicalIF":0.8,"publicationDate":"2022-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41998027","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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