Articlebronze2013

Do Auditing Standards Matter?

73 citations0/0 files storedCurrent Issues in Auditing

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Corporate Governance and Financial Management

Abstract

SUMMARY Properly understanding the economic role of auditing standards is an important step toward improving both audit effectiveness and efficiency. In this essay, I observe that auditing standards are most important when an auditor may have an incentive to under-audit. While this conclusion may not come as a surprise, the conditions under which standards may, or may not, have a desirable effect on audit quality are less obvious. More specifically, I present a number of observations about what standards can do: Standards can (1) compensate for the lack of observability of the audit outcome by focusing on the audit process; (2) partially mitigate the information advantage possessed by the auditor as a professional expert that might motivate the auditor to under-audit; (3) counterbalance the diversity of demand across multiple stakeholders that might drive the audit to the lowest common denominator and create a market based on adverse selection; and (4) provide a benchmark that facilitates the calibration of an auditor's legal liability in the event of a substandard audit. However, I also present a number of observations about what standards should not try to do: Standards should not (1) discourage the use of judgment by auditors; (2) limit the potential demand for economically valuable alternative levels of assurance; (3) lead to excessive procedural routine or standardization in the conduct of the audit; and (4) be set based on an enforcement agenda. In the end, standards overreach may undermine the economic value of the audit to many stakeholders and lead to fee pressure for audit firms. Hopefully, these insights can inform future debates about the level and types of standards that are appropriate for the auditing profession.

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References

1981Auditor size and audit quality 1981The Role of Market Forces in Assuring Contractual Performance 1980The Pricing of Audit Services: Theory and Evidence 2006Audit Fees: A Meta‐analysis of the Effect of Supply and Demand Attributes*2004What do we know about audit quality?2011A Framework for Understanding and Researching Audit Quality 2012Audit Quality: Insights from the Academic Literature 1993Auditing Standards, Legal Liability, and Auditor Wealth

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2020The Future of Assurance in Capital Markets: Reclaiming the Economic Imperative of the Auditing Profession 2018Enhancing auditors' critical thinking in audits of complex estimates 2019Auditing Standards, Professional Judgment, and Audit Quality 2017Credence Goods, Costly Diagnosis and Subjective Evaluation 2014The Use of Business Risk Audit Perspectives by Non-Big 4 Audit Firms 2019Auditor Reputation Concerns, Legal Liability, and Standards

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