The Mismatch between Expectations and Realities of AS 4 Audits: A Post-Implementation Research Analysis
42 Pages Posted: 26 Jun 2017
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The Mismatch between Expectations and Realities of AS 4 Audits: A Post-Implementation Research Analysis
The Mismatch between Expectations and Realities of AS 4 Audits: A Post-Implementation Research Analysis
Date Written: December 2016
Abstract
We conduct a post-implementation research analysis of AS4, a standard guiding voluntary audits of material weakness (MW) remediation disclosures, to understand the reasons for the scarcity of AS4 audits in practice. We use multiple methods (experiments, comment letter analysis, and surveys) to understand the perspectives of key stakeholders. We find that regulators’ expectations of the use of the standard did not come to fruition because an equilibrium market for active use of the standard could not be achieved. Managers desire to engage in AS4 audits for the riskier MWs but do not expect the associated costs to be high. Auditors are reluctant to audit riskier MWs, and would charge a considerable risk premium. Finally, we find that investors value AS4 audits especially for riskier MWs and find value in an AS4 audit for those risky MWs beyond that of the year-end audit. The overall findings of our study indicate a mismatch in the cost-benefit functions of the key stakeholders led to a lack of AS4 audits. Our findings are important given the high costs associated with standard development and approval.
Keywords: auditing; assurance; material weakness remediation; internal controls; PCAOB AS4; standard-setting; value of an audit; demand and supply of auditing
JEL Classification: M42
Suggested Citation: Suggested Citation