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Richie Shi

on 23 June 2015

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Transcript of AICPA V.S. PCAOB

AICPA & Peer Review Program
emerged in the 1970s due to high profile corporate bankruptcies and audit failures
Accounting firms were required to join the SECPS to retain AICPA membership
Important requirement includes undergoing a peer review every 3 years
Peer reviews mainly involve evaluating the quality control system along five dimensions (Katherine et al, 2012)
Sarbanes–Oxley Act of 2002, commonly called "SOX"
Sets new and expanded rules and principles for all U.S. public accounting firms
A federal law designed to protect investors
Enacted in response to the serious financial scandals occurred in the early 2000s including Enron and WorldCom. (Rouse, M. (n.d.))

PCAOB inspection program
- 2002, Self-monitoring (AICPA) SHIFTS to external monitoring (PCAOB)
- Core program areas:
Inspections * most resources devoted, inspection team
Standard setting
Enforcement (Katherine et al, 2012)
PCAOB (Continued)
Mandatory Registration:
Accounting firms, US-based or foreign firms, that issue audit reports for any SEC-reporting company, or substantially participate in the audit
Firms with audit reports > 100: annual inspections
Firms with audit reports <=100: triennial inspections (Katherine et al, 2012)
Public portion (Part I) - Audit deficiencies
Nonpublic portion (Part II and Part III) - Quality Control (Nagy, 2014)
Pros & Cons
of PCAOB External Inspection
Today's Objective
Introduce PCAOB & AICPA inspection regime
Compare these two kinds of inspection programs and advocate for PCAOB as it ensures audit firms to maintain higher levels of quality control or audit quality.
Evaluate audit reports and discuss why the externally regulated program is more beneficial for the stakeholders.
Pros & Cons for AICPA's Peer Review
Administered in cooperation with a state CPA society, group of state CPA societies, and the AICPA Peer Review Board’s National Peer Review Committee (National PRC) as administering entities (AE).
Peer review will be administered by the administering entity in the state in which the CPA firm's main office is located
The AICPA Peer Review Board approves all administering entities.
Peer Review Administration
1. Independence
2. Personnel management
3. Client acceptance
4. Engagement performance
5. Monitoring.

Quality Control Dimensions
- Peer Reviews: similar idea as inspection but it would be EY reviewing Deloitte, etc.
- Experts reviewing experts catches things PCAOB wouldn't
- Lacks independence & enforcement authority
- Too little information
- Pass/ Fail provides less credibility

Peer Review of AICPA
only provide pass/fail
Less informative
lack of Independence
- Enhances independence
- Facilitates objective inspection and enforcement
- Increases the credibility of audit opinions
- Provides important input to improvements
- Reduces audit deficiencies and abnormal accruals
- Lack of expertise
- Untimely ineffective feedback
- Increases firms' litigation risks
- Negatively impact smaller audit firms
Abernathy, J., Barnes, M., & Stefaniak, C. (n.d.). A Summary of 10 Years of PCAOB Research: What Have We Learned? SSRN Journal SSRN Electronic Journal.

AICPA. Peer Review Program. Questions and Answers about the AICPA Peer Review Program. No. 14 Jan 2015.

Burns, J., & Fogarty, J. (2010). Approaches to auditing standards and their possible impact on auditor behavior. International Journal of Disclosure and Governance Int J Discl Gov, 310-319.

Davis, Elizabeth Kroger. An Overview Of Recent Trends In PCAOB Inspection Reports (August 23, 2013). Law 360, New York. http://www.law360.com/articles/466472/an-overview-of-recent-trends-in-pcaob-inspection-reports

Gunny, Katherine and Zhang, Tracey Chunqi, PCAOB Inspection Reports and Audit Quality (December 12, 2012). Journal of Accounting and Public Policy, Forthcoming. http://ssrn.com/abstract=2189385

Nagy, A. (n.d.). PCAOB Quality Control Inspection Reports and Auditor Reputation. AUDITING: A Journal of Practice & Theory, 87-104.

Rouse, M. (n.d.). Sarbanes-Oxley Act (SOX) Definition. Retrieved from http://searchcio.techtarget.com/definition/Sarbanes-Oxley-Act
- AICPA and PCAOB regime
- AICPA and PCAOB reports comparison
- Independence is significantly important
- Competence inconsistency will be minimized
- PCAOB External Inspection Program is superior
"The number and rate of alleged audit deficiencies vary by firm and by year, but no firm or year is without concern. " (Elizabeth, 2013)
PCAOB inspections provide a more credible signal of audit quality to audit clients.
The advantages of the PCAOB program outweigh its disadvantages.
Excerpt from PCAOB Report on 2013 Inspection of PricewaterhouseCoopers LLP
Excerpt from PCAOB Report on 2013 Inspection of PricewaterhouseCoopers LLP
Response of PwC to Draft Inspection Report
Thank you for your time!
Our Position:
Full transcript