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An Analysis of SEC and PCAOB Enforcement Actions against Engagement Quality Reviewers

William F. Messier · Thomas M. Kozloski · Natalia Kochetova

52 citations0/0 files storedAuditing A Journal of Practice & Theory

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

Abstract

SUMMARY: Engagement quality review is an integral part of the audit process. It is designed to be a quality control mechanism for assessing the quality of an audit engagement. Since the 1990s, the Securities and Exchange Commission (SEC) has increased sanctions against partners serving as engagement quality reviewers. Recently, the Public Company Accounting Oversight Board (PCAOB) issued an auditing standard on engagement quality review as required by Section 103 of the Sarbanes-Oxley Act of 2002. This practice note reports on an analysis of SEC and PCAOB enforcement actions against engagement quality reviewers (EQRs). Our results show the following: We identified 28 cases since 1993 that involve some type of sanction against an EQR. Only eight cases involved the Big 4/5 public accounting firms. All of the 28 cases involved sanctions due to violations of GAAS and 75 percent contained GAAP violations. Twenty-three cases identified GAAS violations related to a lack of due professional care. Further analysis of those cases showed that the EQR demonstrated a lack of professional skepticism in 22 cases, over-relied on management representations in 20 cases, and ignored materiality concerns in five cases. About half of the 28 cases resulted in the EQR being denied the privilege of practicing before the SEC or PCAOB for three or more years. Our findings provide important implications for practitioners and regulators, and areas for future research for those interested in engagement quality review.

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References

1990The case for motivated reasoning.2009A Model and Literature Review of Professional Skepticism in Auditing 2003The Effect of Quality Assessment and Directional Goal Commitment on Auditors' Acceptance of Client-Preferred Accounting Methods 1997Judging Auditors' Technical Knowledge 1995Research in and development of audit-decisions aids 2007Engagement Quality Reviews: A Comparison of Audit Firm Practices 1993Problem-centred research and knowledge-based theory in the professional accounting setting

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