The Impact of PCAOB-Type Regulations on Auditors under Different Legal Systems

64 Pages Posted: 4 Dec 2015 Last revised: 16 Sep 2017

See all articles by Minlei Ye

Minlei Ye

University of Toronto

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Date Written: August 4, 2017

Abstract

This paper analyzes the impact of Public Company Accounting Oversight Board (PCAOB)-type regulatory oversight on audit quality, audit value, and the audit market under different legal systems. Conventional wisdom suggests that regulatory oversight may be just a simple addition to a legal system as an alternative discipline mechanism. According to this perspective, the addition of another disciplinary mechanism does not necessarily increase audit effort, since once effort meets the auditing standards, auditors have no incentive to provide a higher level of effort. In this case, a strong legal system is a sufficient deterrent and regulatory oversight can impose an extra burden on auditors without enhancing audit value. Our analysis, in contrast, suggests that regulatory oversight can improve audit value even when the legal system is strong. This is because auditors will provide higher assurance by improving their effectiveness in detecting material misstatements. When the legal system is weak, regulatory oversight can improve audit value, but it cannot substitute for a strong legal system completely. This is the first study that analyzes the possible effects of an audit regulator on auditors, and our results enhance understanding of the complex relationship between regulatory oversight, legal system strength, and audit value.

Keywords: Regulatory oversight, auditing standards, audit quality, audit value

JEL Classification: M42; M48

Suggested Citation

Ye, Minlei and Simunic, Dan A., The Impact of PCAOB-Type Regulations on Auditors under Different Legal Systems (August 4, 2017). 2016 Canadian Academic Accounting Association (CAAA) Annual Conference, Rotman School of Management Working Paper No. 2697268, Available at SSRN: https://ssrn.com/abstract=2697268 or http://dx.doi.org/10.2139/ssrn.2697268

Minlei Ye (Contact Author)

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
302
Abstract Views
1,581
rank
126,932
PlumX Metrics