Audit quality examined one large CPA firm at a time: mid-1990’s empirical evidence of a precursor of Arthur Andersen’s collapse

The largest CPA firms have been regarded as quality-differentiated auditors. This has been a prominent assumption of empirical research in accounting and auditing. Yet, prior research has only tested whether the largest CPA firms, in the aggregate, are quality-differentiated auditors. This paper contributes to the audit quality literature by individually examining each of the largest CPA firms. This new approach is timely, given the questions that have been raised concerning Arthur Andersen.</jats:p

The Big 4 Audit Report: Should the Public Perceive It as a Label of Quality?

ABSTRACT: There has been little research comparing the relative performance of the Big 4 CPA firms. Users of audited financial statements often practically have no other CPA firms to choose from for auditing services in the large public company auditing services market and thus desire more of this information. In 1,017 financial reporting lawsuits against Big 5 auditees filed from 1999 through 2004, the auditor litigation outcomes are used to proxy for the likelihood of audit failure and thus for audit quality. Control variables significant in prior empirical work were used in polytomous regression and in logistic regression. Ernst &amp; Young has comparatively better auditor litigation outcomes, which proxy for a lower likelihood of audit failure and a stronger level of audit quality. The Ernst &amp; Young results are robust; they are insensitive to the use of ten different model specifications. There is also evidence suggesting that PricewaterhouseCoopers may be a comparatively high quality auditor, but these latter results are sensitive to the model specification. Clearly, the null hypothesis of consistency in audit quality among the Big 4 CPA firms is rejected.</jats:p

Re-evaluating the effectiveness of auditing standard no. 2: longitudinal analysis of restatements and the outcome of auditor litigation in lawsuits filed from 1996 to 2009

We provide evidence of the impact of Auditing Standard No. 2 (“AS 2”), issued pursuant to the Sarbanes-Oxley Act of 2002 (“SarBox”), on the outcome of auditors in financial reporting litigation. Specifically, we focus on the existence of financial restatements and how and why they affected the outcome of the auditor in the financial reporting lawsuits. Our longitudinal method subjected to year-by-year regression analysis 2,059 financial reporting lawsuits filed from 1996 to 2009. Our results indicate that restatements are positively associated with more severe outcomes for the auditor in lawsuits filed in 2002 and in the years after 2004. However, restatements are not significant in lawsuits filed in 2003 and 2004. Pressure from SarBox Section 906 criminal penalties and Section 302 requirements to disclose material weaknesses, coupled with a lack of guidance to distinguish material weaknesses from significant deficiencies, temporarily and indirectly caused the issuance of a large number of restatements that were not material or comprehensible to participants in the legal system. Thus, they were temporarily unable to use the restatements to inform their litigation behavior. However, after the June 17, 2004, release of AS 2, participants in the legal system were again able to use the restatements to inform their behavior. This suggests that AS 2, notwithstanding its inefficiency, necessitating its subsequent superseding by Auditing Standard No. 5 (“AS 5”), increased audit effectiveness and financial reporting quality by facilitating more accurate identification of material weaknesses</jats:p

Wells Fargo: Did KPMG perform its duties? An auditing case about consumer fraud

This article describes the implementation of a case study that uses as its setting the role of KPMG in the Wells Fargo consumer fraud scandal as a way for students to learn about what can happen during an audit failure and what should be done to prevent audit failure. As the case details illustrate, it features the only recent significant Big 4 audit failure that is still being resolved, the audit failure includes many aspects of an auditor’s job, including some that typically are not covered in traditional course textbooks, and it highlights the auditor’s role within the broader context of corporate governance. This case study exposes students to several auditing standards and laws related to 1) consumer fraud; 2) contingent liabilities; 3) materiality; 4) illegal acts; 5) audit evidence; 6) audit opinions; 7) auditor independence and mandatory rotation; 8) auditor liability under the Securities Act of 1933; and 9) auditor liability under the Securities Exchange Act of 1934. The case was used in two undergraduate auditing classes and a graduate auditing class. Student opinion surveys were used to ascertain the learning outcomes of the case study. The survey results suggest strong student engagement and support for learning in groups while collaborating on the case study. The case results also show particularly strong knowledge enhancement with regard to understanding the auditor’s duty to disclose illegal acts, understanding consumer fraud, understanding audit evidence, understanding materiality, and understanding contingent liabilities.</jats:p