Should auditors be reviewed by peers or should the state do it?

Rather than 'who', the most important question is 'how' auditors are audited, argues Lukas Löhlei

From peer review to PCAOB inspections: regulating for audit quality in the U.S.

This study reviews the existing literature on the U.S. peer review system and the Public Company Accounting Oversight Board (PCAOB) inspection system to assess our knowledge of audit regulation. The traditional self-regulatory system of the accounting profession came to an end, in 2002, when the PCAOB was established to oversee the audit firms of publicly traded companies. This paper contributes to the controversial debate about self-regulation versus independent regulation by analyzing, categorizing, and comparing the research findings on the peer review system and the PCAOB system along three dimensions: the validity of peer reviews and PCAOB inspections, the recognition of reviews and inspections by decision-makers (e.g., investors, bankers, committees), and the effect of reviews and inspections on audit quality. Synthesizing the research on the regulatory regimes suggests that the notion of external quality control, both through peer reviews and government inspections, is positively linked with an improvement of audit quality. At the same time, the analysis indicates that external users do not seem to recognise peer review and PCAOB reports as very useful instruments for decision-making, which is in line with an identified rather skeptical perception of the audit profession on reviews and inspections. Overall, this study reveals that although the academic literature on peer review and PCAOB inspection is extensive it has not produced definitive conclusions concerning various aspects of audit regulation. This paper shows how this blurred picture is due to conflicting research findings, the dominance of the quantitative research paradigm, and unchallenged assumptions within the literature, and concludes by proposing research opportunities for the future

Theorizing (and) the future of interdisciplinary accounting research

While interdisciplinary accounting research (IAR) is recognized as a polyphonic space for innovation and pluralism, scholars have increasingly expressed unease about the discipline’s future trajectory. This paper focuses the role of theory and how it contributes to stagnation and progress in IAR. To counter stagnation, some have advocated for more theoretical reflection, while other voices call for less emphasis on theory for the sake of pursuing practically relevant research. As young researchers, we reframe this debate by focusing on researchers’ everyday experiences with producing and developing theory. Drawing on a combination of autoethnographic material and interviews, we focus on how researchers ask questions, sort through literature, write and cite, present, and review papers for journals. Through the analysis of these materials, we provide three contributions. First, we highlight where, and through which practices, theoretical stagnation persists. Second, we outline suggestions for changing how we work, which address stagnation in concrete and actionable ways. Third, we propose rethinking theory – not as a process or product, but as a life-long event. We argue that these insights will help us focus on impactful research that emerges with and not despite theory

Measuring the independence of audit oversight entities: a comparative empirical analysis

Purpose: Independent audit oversight is a prerequisite for restoring public confidence in financial reporting and auditing after the past accounting scandals and the financial crisis. By analysing and comparing the independence of the audit oversight boards of 27 European Member States and the USA, this study aims to provide insights into the question of how independent “independent” audit oversight boards are. Design/methodology/approach: Independence is measured in terms of the organisational compositions and regulatory competences of the audit oversight authorities. The data were collected through an e-mail questionnaire that was sent to all European oversight authorities, and by analysing legal provisions of various regulators. The results are analysed and visualised by a Partial Order Scalogram Analysis with Coordinates, which allows conclusions about the similarities of various systems and their relative levels of independence. Both measurements are then equally combined into one value of material independence, which is used to rank the oversight authorities. Findings: Although all countries encounter similar pressures to establish profession-independent oversight systems, this study identifies how differently “independence” has been translated in regulatory outcomes. While all countries claim to possess formal independent oversight bodies, there is a visible gap between countries with comparatively strong independent oversight authorities and systems in which accounting bodies still maintain far-reaching regulatory influence. At the same time, the results question the role of the Public Company Accounting Oversight Board (PCAOB) as the globally perceived benchmark of an entirely independent regulator. Research limitations/implications: This study focuses on formal independence rather than de-facto independence. Future research has, therefore, to address how these formal arrangements have evolved in regulatory practice. Practical implications: Policy makers around the world perceive independent oversight as one of the essential elements of regulatory reforms aiming at restoring public confidence in the aftermath of past accounting scandals. This study enables the comparison and benchmarking of national specific regulatory designs with other forms of independent oversight. Originality/value: Although the role of independent regulation is a recurring theme in accounting research, a systematic and encompassing comparison of the intertwining of audit oversight authorities and the accounting profession has not yet been provided. This study takes a first step towards providing a quantifiable measure of the formal independence of audit oversight authorities by mobilizing concepts, methods and prior findings from the field of public policy research

Same but Different - Comparing Comparing European Audit Oversight Regulation

Over the last years, the European Union passed various provisions to strengthen the independence of European audit oversight systems. However, a systematic and encompassing comparison of the reform outcomes across the European Member States is still missing. This paper therefore explores the various forms of regulation that are in place among the EU Member States and the diverse ways of responding to common European legislative initiatives and international harmonization pressure. Although observers predicted that market pressures would reduce the differences in the regulation of statutory auditors over time, the analysis reveals significant differences in the way in which Member States organize their public oversight systems

How independent are public audit oversight systems? An interdisciplinary approach to accounting regulation. (forthcoming)

The independence of audit oversight systems is the most essential prerequisite for restoring public confidence in audits after the past accounting scandals and financial crisis. Thus, over the last years, the European Union passed various provisions to strengthen the independence of European oversight systems. However, a systematic and encompassing comparison of the reform outcomes across the European Member States is still missing. This study is the first that provides insights into the question as to how independent the “independent” audit oversight boards are. Their independence is measured both in terms of their institutional composition (e.g. appointment procedures of the board members) and regulatory competencies (e.g. the way audit firms are inspected). The results are visualized by a Partial Order Scalogram Analysis (POSAC), which allows conclusions about the similarities of various countries and their relative levels of independence. Both measurements are then equally combined into one value of material independence and to a rank order of all European oversight systems and the U.S. PCAOB is set up. The study shows that, while the oversight of financial reporting is conducted by securities regulators in most European Member States, the field of auditing still has a long way to go to achieve regulatory harmonization. The analysis reveals considerable diversity with regard to the way the various European oversight systems are organized and operate. While countries such as Luxembourg, Italy, Latvia and the UK possess relatively independent oversight systems, the systems of Ireland, Portugal and Slovakia show low levels of independence. Since the different systems are strongly interrelated with the accounting profession, I point out that these countries have focused on creating “independent” oversight entities rather than on implementing truly independent regulation. The paper also questions the role of the PCAOB as regulatory “benchmark”: Although the PCAOB shows the most independent values in terms of regulatory competencies, the institutional independence of the PCAOB from the accounting profession seems to be less strong than the literature suggests