An Updated Analysis of Enforcement Actions Against Engagement Quality Reviewers

Abstract

Engagement quality review (EQR) is designed to be a quality control mechanism for improving the quality of audit engagements. This paper updates the findings of Messier, Kozloski and Kochetova-Kozloski (2010) on enforcement actions against engagement quality (EQ) reviewers, especially in light of the December 2009 implementation of the new standard on engagement quality review - Auditing Standard No. 7 (AS7). We identified 16 enforcement actions since 2009 that involve some type of sanction against an EQ reviewer. Only two cases involved a Big 4 firm. Thus, the vast majority of cases involved EQRs from smaller public accounting firms. Six cases occurred prior to the implementation of AS7, nine cases occurred after AS7 took effect, and one case involved violations both prior to and after AS7 implementation. All of the pre-AS7 cases involved sanctions resulting from an inadequate EQR. In contrast, all of the post-AS7 cases involved sanctions resulting from a failure to perform an EQR. Our review of these post-AS7 cases suggests that some small firms either were unable or unwilling to bring in qualified outside reviewers. Our findings provide important implications for practitioners, regulators, and researchers interested in engagement quality review and in improving the overall quality of audit engagements.

Keywords: Engagement quality review, SEC Enforcement Actions, PCAOB Disciplinary Proceedings, Due professional care, Professional skepticism

JEL Classification: M40