PCAOB Inspections: Public Accounting Firms on 'Trial'

Posted: 23 Jun 2018 Last revised: 22 Jul 2018

See all articles by Kim Westermann

Kim Westermann

Cal Poly San Luis Obispo

Jeffrey R. Cohen

Boston College - Department of Accounting

Greg Trompeter

University of Central Florida

Date Written: May 15, 2018

Abstract

The objective of our paper is to obtain a better understanding of how auditors anticipate the potential for PCAOB inspection, experience the inspection, cope with the consequences of the inspection, and understand the PCAOB's influence within the context of professionalism. We use a qualitative approach that employs both surveys (55) and interviews (20) of auditors (of varying rank and firm) across a five-year period (2012-2017). Respondents suggest that PCAOB inspectors are powerful, representing the 'prosecution', 'judge', and 'jury' of the auditing profession. We therefore employ a structural metaphor of the PCAOB inspection as a judicial 'trial'. By controlling the criteria for which to evaluate performance, inspectors have the power to repeatedly 'subpoena', 'interrogate', and return a 'verdict' on the firm (auditor); those judged as 'guilty' require supervised 'probation'. This process is perceived as having improved audit quality, but at a cost. Passing an inspection is so important, that auditors (firms) have resorted to impression management strategies and "functionally stupid" work practices (e.g., excessive documentation, a decrease in critical thinking as a result of a "box ticking" approach to auditing). Further, some respondents believe that being a good auditor has come at the expense of being a good accountant; the emphasis on audit process and concurrent de-emphasis on technical accounting could ultimately lead to audits themselves falling short. In addition, it is evident that inspectors and auditors differ in their perceptions of risk; likely manifesting because inspectors are standards focused while auditors (firms) are methodology focused. Finally, the inspection process has created excessive stress and tension, beyond budget and fee pressures, which some auditors perceive as affecting the pool of talented auditors that firms may be able to attract and retain in the future.

Keywords: Auditing, Inspections, Metaphor, PCAOB, Professionalism, Qualitative

Suggested Citation

Westermann, Kimberly and Cohen, Jeffrey R. and Trompeter, Gregory, PCAOB Inspections: Public Accounting Firms on 'Trial' (May 15, 2018). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3193012

Kimberly Westermann

Cal Poly San Luis Obispo ( email )

San Luis Obispo, CA 93407
United States

Jeffrey R. Cohen (Contact Author)

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3165 (Phone)
617-552-2097 (Fax)

Gregory Trompeter

University of Central Florida ( email )

PO Box 161400
Orlando, FL 32816
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
424
PlumX Metrics