Is Self-Regulated Peer Review Effective at Signaling Audit Quality?

30 Pages Posted: 15 Oct 2006

See all articles by Jeffrey R. Casterella

Jeffrey R. Casterella

University of Auckland

Kevan L. Jensen

University of Oklahoma - John T. Steed School of Accounting

W. Robert Knechel

University of Florida - Fisher School of Accounting

Date Written: September 2006

Abstract

This paper examines whether peer review conducted under the AICPA's self-regulatory regime has been effective at signaling audit quality. In spite of the long-standing debate about self-regulated peer review in the auditing profession, there is a surprising lack of research evidence as to whether such reviews are effective at signaling or improving audit quality. Prior research has examined whether the information contained in peer-review reports is associated with perceived audit quality (Hilary and Lennox 2005). We examine whether the information contained in peer-review reports is associated with actual audit quality. Our results suggest that self-regulated peer review does appear to provide effective signals regarding audit-firm quality. Specifically, we find that the number of weaknesses identified in peer-review reports is associated with other potential indicators of weak quality control or risky practices within accounting firms such as selling tax shelters, overworking staff, and taking on risky clients—even after controlling for changes in the peer-review environment over time. We also find that the number of weaknesses identified in peer-review reports is useful in predicting audit failure (i.e., malpractice claims alleging auditor negligence), and that certain types of peer-review findings (engagement-performance weaknesses, personnel-management weaknesses) are particularly useful in this regard.

Keywords: Peer Review, Audit Quality, Quality Control

JEL Classification: G18, L51, M49

Suggested Citation

Casterella, Jeffrey R. and Jensen, Kevan L. and Knechel, W. Robert, Is Self-Regulated Peer Review Effective at Signaling Audit Quality? (September 2006). Available at SSRN: https://ssrn.com/abstract=937368 or http://dx.doi.org/10.2139/ssrn.937368

Jeffrey R. Casterella

University of Auckland ( email )

Auckland
New Zealand
970-2170947 (Phone)

Kevan L. Jensen (Contact Author)

University of Oklahoma - John T. Steed School of Accounting ( email )

307 West Brooks
Norman, OK 73019-4004
United States

W. Robert Knechel

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

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