Deficiencies in Auditing Related-Party Transactions: Insights from AAERs

Louwers, Timothy J.; Henry, Elaine; Reed, Brad J.; Gordon, Elizabeth A.

doi:10.2308/ciia.2008.2.2.a10

Cited by 28 publications

(25 citation statements)

References 4 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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“…Each major audit partnership applies its own detailed proprietary methodology. However, some common general features include an assessment of the adequacy of operating management oversight, the complexity of the operating environment, the experience and turnover of management, the nature of transactions in terms of numbers and dollar volumes (see Louwers et al, 2008 for a more extensive list). As regulators have become more proactive and prepared to make public their findings, another critical risk factor is the likelihood of regulatory investigation, action, litigation and the consequent loss in reputation.…”

Section: Hypothesesmentioning

confidence: 99%

External Auditor Reassessment of Client Business Risk Following the Issuance of a Comment Letter by the SEC

Gietzmann¹,

Pettinicchio

2013

European Accounting Review

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Following Arthur Andersen's conviction for obstructing justice, auditors faced a one-time significant change in their regulatory environment because it was clear that (i) major audit partnerships could be closed and (ii) post Sarbanes-Oxley Act (SOX), regulators would take a far more attentive (aggressive) role. In response auditors considered whether the pricing of audits should be revised to take account of the increased risk of regulatory intervention and litigation. Obviously such re-pricing would need to be targeted at those firms for which the risks were greatest. One early warning signal of such events occurring is the issuance by the Security Exchange Commission (SEC) of a Comment Letter (CL). We investigate whether there is any evidence that if a client receives a CL this is used to re-price audit services. Specifically, we investigate whether issuance resulted in upward pressure on audit fees, and whether this effect was simply transient around the issuance period or alternatively persisted some years into the future. This research finds that after a client receives a CL, auditors adjust audit fees upwards in the period in which the CL is received. In addition it is shown that for subsequent periods in which the auditor does not spend time assisting the client respond to a specific CL, an initial rise in audit fee persists. This is consistent with the hypothesis that auditors reassess the reputation and litigation risk of the client on the basis of the SEC issuance of a Comment Letter.

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“…Nevertheless, an underlying reason of RPT's commitment is difficult to be identified (Louwers, Henry, Reed & Gordon 2008) either to represent efficient or conflict of interest, particularly at international level due to different requirements and standards for RPT's disclosure. RPTs have caused many audit failures (Beasley et al 2000).…”

Section: Rpts and Expropriation In East Asiamentioning

confidence: 99%

Do Managers Reappoint Auditor for Related Party Transactions? Evidence from Selected East Asian Countries

Rahmat

Ali

2016

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We study the association between auditor reappointment (initial relationship stage), including recurring auditor appointment over several consecutive years (close relationship stage) and company engagement in related-party transactions (RPTs) for selected listed companies from Hong Kong, Malaysia, Singapore and Thailand. The results show that auditor reappointment has significant and negative associations with company engagement in RPTs. By contrast, the close ACR relationship increases company engagement in RPTs. The evidence also suggests that Big 4 audit firms can reduce company engagement in RPTs, even when they have a close relationship. However, the findings derived from a sub-sample of RPT companies suggest that the close relationship between Big 4 audit firms and their clients substantially encourages companies to engage in RPTs. Overall, these findings are consistent with theories in which higher audit quality is effective at monitoring RPTs, but the established relationship looks likely to create conflicting opinions that impair auditors' independent judgment. Nevertheless, the likelihood of conflict disappears when clients operate in countries that more effectively implement and enforce regulations and protect minority shareholders.

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Deficiencies in Auditing Related-Party Transactions: Insights from AAERs

Cited by 28 publications

References 4 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

External Auditor Reassessment of Client Business Risk Following the Issuance of a Comment Letter by the SEC

Do Managers Reappoint Auditor for Related Party Transactions? Evidence from Selected East Asian Countries

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