In light of the growing importance of internal audit functions (IAF) and the limited archival evidence on internal audit quality, we examine an interactive model of IAF quality (comprised of competence and independence) to better understand the determinants of IAF effectiveness as a financial reporting monitor. Our tests support the hypothesis that the joint presence of competence and independence is a necessary antecedent to effective IAF financial reporting monitoring. In sum, our results show that, the answer to “what is the effect of internal audit competence (independence) on financial reporting quality?” is “it depends on the independence (competence) of the internal auditor.” Our study extends the understanding of IAF quality determinants in the realm of financial reporting as it relates to ongoing discussions by researchers, standard setters, regulators, and practitioners.

SUMMARY Using structured interviews and surveys of practicing audit partners, this study examines their perceptions with regard to mandatory partner rotation and cooling-off periods, and how recently enacted, more stringent rules, may negatively impact auditors' quality of life to the detriment of audit quality. Results suggest rotation, in general, increases partners' workloads and the likelihood of relocation. Additionally, results suggest that in response to accelerated rotation (and an extended cooling-off period), partners would rather learn a new industry than relocate. Importantly, partners perceive audit quality suffers from retraining, but not from relocating. Thus these results suggest an indirect, negative impact, and unintended consequence, of accelerated rotation/extended cooling-off periods on audit quality. Data Availability: The survey instrument is available upon request. Individual audit partner responses are confidential.

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SYNOPSIS: We solicit perceptions of the Public Company Accounting Oversight Board’s (PCAOB) inspection process from the leadership of triennial firms (100 or fewer publicly traded audit clients, inspected triennially) receiving their initial inspection. Our research is motivated by a growing stream of academic research related to triennial firms. Practitioners have called for research to determine whether the performance of audits in the Sarbanes-Oxley era may fail to attain the stated objective of enhancing investor confidence in the capital markets. Academics note further PCAOB inspection research can provide important insights into the consequences of PCAOB inspection for auditors and other market participants. In general, smaller respondents reported initial PCAOB inspections resulted in a negative impact on many aspects of their audit practices, while medium and larger firms reported more favorable consequences. Collectively, responding firms evaluated their initial inspection team’s performance favorably, but were more critical of other aspects of the inspection process. Levels of satisfaction with nearly all aspects of PCAOB inspections appear to increase with firm size and the passage of time. We interpret our findings as suggesting the efficacy of PCAOB inspections may be enhanced by focusing on potential unintended consequences and inspection process modifications rather than on inspectors’ qualifications and actions.

In 2004, the Public Company Accounting Oversight Board (PCAOB) began inspecting registered accounting firms performing audits of US publicly-traded companies. We examine triennially inspected auditors' involuntary and voluntary client losses in the period following receipt of a deficient PCAOB report. We find deficiency reports are associated with triennially inspected auditors being involuntarily dismissed by their clients, and companies dismissing triennially inspected auditors are more likely to hire triennially inspected auditors without deficiency reports, suggesting PCAOB inspections may be costly to triennially inspected auditors. We also find deficiency reports are associated with triennially inspected auditors voluntarily resigning from their publicly traded clients, and ceasing to be registered with the PCAOB, suggesting triennially inspected auditors with deficiency reports may be more likely to assess the post-inspection cost of regulatory compliance as greater than the rewards associated with auditing public companies. These findings are important to regulators, market participants, and academics -both in the US and internationally -as they evaluate whether provisions of SOX effectively address concerns about audit quality or may have unintended negative consequences.