Do Accounting Firm Consulting Revenues Affect Audit Quality? Evidence from the Pre- and Post-SOX Eras

In recent years, public accounting firms have experienced a steady increase in the proportion of their revenues generated from consulting services. Although growth in consulting revenue following the Sarbanes‐Oxley Act (SOX) has been generated primarily from services provided to nonaudit clients, regulators have expressed concerns about the potential implications of this increase for audit quality. In contrast, accounting firms assert that the expertise developed by their consulting professionals helps them to provide better quality audits. We examine the relation between the proportion of accounting firm consulting revenue to total revenue and audit quality and investor perceptions of audit quality. Because SOX drastically altered the source of consulting revenues for public accounting firms, we also separately examine these relations in the pre‐ and post‐SOX eras. We find evidence suggesting that before SOX, higher proportions of audit firm consulting revenues negatively impacted both audit quality and investor perceptions of audit quality. However, we do not find a statistically significant association between audit firm consulting revenues and either audit quality or investor perceptions of audit quality following SOX. Our analyses suggest that even if these relations exist following SOX, the potential economic magnitude of the effect is small

The Consequences of Writing Not So Readable Responses to SEC Comment Letters The Consequences of Writing Not So Readable Responses to SEC Comment Letters

* We thank workshop participants at the University of Miami and the University of Tennessee for providing helpful comments and suggestions. We thank Feng Li for providing the Form 10-K readability data through his website. We also benefited from valuable programming assistance from Jonathan Lisic and research assistance from Steven Hawkins. Electronic copy available at: http://ssrn.com/abstract=2595661 The Consequences of Writing Not So Readable Responses to SEC Comment Letters Abstract An emerging literature shows that shareholders benefit from the Securities and Exchange Commission's (SEC) filing review process in terms of improved disclosures and reduced information asymmetry. However, SEC filing reviews also impose significant costs on companies because the comment letter remediation process diverts substantial time and resources away from normal operations. Using the Fog index to measure the readability of the company's response to an SEC comment letter, we find that more readable company responses are associated with shorter response times (i.e., the number of days it takes the SEC to respond to the company's initial response letter and the number of days it takes the SEC to close the filing review), a lower likelihood the SEC issues follow up comments, fewer rounds of comments, and a lower probability of a restatement stemming from the filing review. Thus, we identify a relatively easy and inexpensive way for companies to mitigate the costs of the comment letter remediation process. We expect that our results will be of interest to managers, boards of directors, audit committees, and other stakeholders involved in formulating responses to SEC comments because they suggest that response readability can have a significant effect on regulators' reaction to the disclosure

Accounting fraud, auditing, and the role of government sanctions in China

We use the unique economic, legal, and political landscape of China to examine the impact of auditors on the incidence of accounting fraud. In particular, we examine whether large audit firms reduce the incidence of financial statement fraud in China, an emerging market in which auditors face strong government sanctions but low litigation risk associated with audit failures. We find that companies audited by large audit firms are less likely to commit financial statement fraud. This effect is stronger for regulated industries and for revenue-related frauds. Our results are robust to considering the severity of fraud, excluding firms cross-listing in other jurisdictions, using alternative measures of fraud, accounting for the self-selection of auditors, and controlling for other corporate governance mechanisms. Our results highlight the role of government sanctions in assuring audit quality and have important practical implications to help international audit firms - and businesses more generally - successfully compete in China

Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB Rulemaking Docket Matter 029: PCAOB Release No. 2011-007, Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits

In October 2011, the Public Company Accounting Oversight Board (PCAOB or Board) issued a release to solicit public comment on amendments to its standards that would improve the transparency of pubic company audits. The objective of the release was to solicit public comments on a proposed standard that would (1) require registered public accounting firms to disclose the name of the engagement partner in the audit report, (2) amend the Board\u27s Annual Report Form to require registered firms to disclose the name of the engagement partner for each audit report already required to be reported on the form, and (3) require disclosure in the audit report of other independent public accounting firms and other persons that took part in the audit. The PCAOB provided for a 91-day exposure period (from October 11, 2011, to January 9, 2012) for interested parties to examine the release and provide comments. The Auditing Standards Committee of the Auditing Section of the American Accounting Association provided the comments in the letter below to the PCAOB on PCAOB Rulemaking Docket Matter 029: PCAOB Release No. 2011-007, Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits