An Analysis of SEC and PCAOB Enforcement Actions Against Engagement Quality Reviewers

37 Pages Posted: 23 Apr 2009 Last revised: 28 Dec 2009

See all articles by William F. Messier, Jr.

William F. Messier, Jr.

NHH Norwegian School of Economics

Thomas M. Kozloski

Saint Mary's University - Sobey School of Business

Natalia Kochetova

Saint Mary’s University - Sobey School of Business

Date Written: December 24, 2009

Abstract

Engagement quality review is an integral part of the audit process. It is designed to be a quality control mechanism for assessing the quality of an audit engagement. Since the 1990s, the SEC has increased sanctions against partners serving as engagement quality reviewers. Recently, the PCAOB issued an auditing standard on engagement quality review as required by Section 103 of the Sarbanes-Oxley Act of 2002. This practice note reports on an analysis of SEC and PCAOB enforcement actions against engagement quality reviewers (EQRs). Our results show the following: We identified 28 cases since 1993 that involve some type of sanction against an EQR. Only eight cases involved the Big 4/5 public accounting firms. All of the 28 cases involved sanctions due to violations of GAAS and 75 percent contained GAAP violations. Twenty-three cases identified GAAS violations related to a lack of due professional care. Further analysis of those cases showed that the EQR demonstrated a lack of professional skepticism in 22 cases, over-relied on management representations in 20 cases, and ignored materiality concerns in 5 cases. About half of the 28 cases resulted in the EQR being denied the privilege of practicing before the SEC or PCAOB for 3 or more years. Our findings provide important implications for practitioners and regulators, and areas for future research for those interested in engagement quality review.

Keywords: Engagement quality review, SEC Enforcement Actions, and PCAOB Disciplinary Proceedings

JEL Classification: M40

Suggested Citation

Messier Jr, William F. and Kozloski, Thomas M. and Kochetova, Natalia, An Analysis of SEC and PCAOB Enforcement Actions Against Engagement Quality Reviewers (December 24, 2009). Auditing: A Journal of Practice & Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1392377

William F. Messier Jr (Contact Author)

NHH Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
678-386-8634 (Phone)

Thomas M. Kozloski

Saint Mary's University - Sobey School of Business ( email )

923 Robie Street
Halifax, Nova Scotia B3H 3C3
Canada

Natalia Kochetova

Saint Mary’s University - Sobey School of Business ( email )

SB 318, Dept. of Accounting
Sobey School of Business, Saint Mary's University
Halifax, Nova Scotia B3H 3C3
Canada
902-420-5800 (Phone)
902-420-5011 (Fax)

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