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Public Oversight

4 important questions on Public Oversight

What is the goal of the PCAOB Foreign Inspection Program?

- Seeks to improve audit quality for foreign auditor's US-listed clients
- Assesses firms' compliance with SOX, the rules of the Board and the rules of the SEC and professional standards

What are reasons to doubt the efficiency of PCAOB foreign inspections on improving AQ?

1.Prior research indicates that PCAOB reports are not useful because they merely list audit deficiencies and do not provide a summary opinion about the auditor’s quality and questions are raised about the qualifications/knowledge of practicing inspectors. 2.The effectiveness may be limited by geographical distance from the US, language difference and cultural barrier.
3.Litigation exposure is lower in non-US countries -> there is less incentives to improve AQ. 4.Audit firms may apply a different approach to the US-listed clients and their non-US listed clients.

What are reasons to support the efficiency of PCAOB foreign inspections on improving AQ?

Main reason: inspection may expose foreign auditors’ to possible reputation loss 1.This provides incentives to strengthen firm-level quality control and increase AQ.
2. Further embarrassment and adverse publicity on subsequent inspection à could lead to loss of clients and market share and eventually in lower audit fees in the future.
3.It could lead to reputation loss – ex ante (before) incentive to improve AQ.

When is the impact stronger?

- When the likelihood of a foreign auditor being inspected by the PCAOB is lower- In countries without a substantive increase in financial reporting enforcement
- In countries with lower liability standards for accountants

- For earlier (versus later) initial inspections
- For foreign auditors affiliated with one of the six global audit firm networks (GNs)

The question on the page originate from the summary of the following study material:

Audit and Assurance

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