Research Opportunities in Auditing

1. Research Opportunities in Auditing Ann Vanstraelen, Maastricht University Doctoral Consortium AAA- Auditing Section 12 January 2012

2. Outline • Why doing a PhD in auditing? • Audit market & regulation • Different players in the ‘auditing game’ • How can we advance our knowledge? • Main changes in EU regulation • Current issues & research opportunities • Concluding comments

3. Why doing a PhD in auditing? Effective & efficient allocation of Human capital resources Stakeholders Auditing profession Audit demand Audit supply Audit market

4. Audit market & regulation • What is the ‘raison d’être’ of the audit market? • When do regulators perceive the need to intervene? • Important changes in the regulatory landscape of accounting & auditing • Research opportunities of global interest

5. Different players in ‘auditing game’ • Academics: • In the past: research largely ignored by policy-makers • Currently: more interest in research by standardsetters and regulators • Auditing profession: • In the past: in the ‘driver’s seat’ • Standardsetters and regulators: • Currently: dominant players using voice of stakeholders

6. How can we advance our knowledge in auditing? • Interaction is needed between academics and the auditing profession • Auditing profession should open up • Much more to be learned: e.g. gain insight into effectiveness and efficiency of the audit process • Risk of standard rules & compliance check by POB: ignore idiosyncratic nature of auditing (Knechel, 2009). • Effects of individual auditors on audit quality • Impact of new (proposed) regulations on auditor incentives & behavior • Try to break down myths and presumptions used by regulators as arguments to intervene

7. Main changes in EU regulation • One set of EU regulations for financial reporting and auditing with the objective of harmonizing financial reports and audits • IFRS: 2005 • ISA: expected 2012 • Introduction of independent oversight & enforcement over financial reporting and auditing • Oversight of financial reporting done by national securities authorities • Oversight of auditing done by national securities authorities or auditing profession with an independent monitoring body • Coordinate and facilitate consistency of oversight activities: ESMA

8. Main changes in EU regulation • Revised 8th EU Directive (2006, implementation deadline 2008) • A lot of similarities with SOX • Some unique aspects • EU Green paper on Audit Policy (October 2010) • After consultation proposals issued (November 2011) to be approved by the European parliament • 1/3 revenues from PIEs: pure audit firms • Mandatory audit firm rotation: 6 years • …

9. Main changes in EU regulation • …create interesting settings. Examples: • Common standards with national oversight & enforcement • Competition to attract foreign investors? • Can harmonization goal be achieved? • Divergence: national versus international standards • EU only sets minimum standards • E.g. joint audit is voluntary

10. Current issues & research opportunities in auditing • Public oversight • Emerging field of research • Not much known yet about most efficient and effective ways of public oversight • Not much known yet about effectiveness, impact on auditor behavior, economic consequences • EU interesting setting: • Different options to organize public oversight • Variation in level of transparency on inspection results

11. Current issues & research opportunities in auditing • Audit market concentration • Key issue of concern in EC Green paper on Audit policy (October 2010) • Substantial body of research, but key question remains relevant • EU interesting setting: substantial variation in the audit market in terms of dominance of the Big 4 and level of concentration within the Big 4 (Francis et al. 2011)

12. Current issues & research opportunities in auditing • Audit quality • Large body of literature on AQ and differential AQ (see Francis, AJPT, 2011 for overview) • Key issue: • Instruments to measure AQ are limited • Regulators are working on developing AQ indicators • More interaction with the auditing profession • Some questions: • What is the relationship between audit quality, transparency and competition? • What is the role of the AC in the supervision of the audit function? • Is it optimal to strive for a uniform level of AQ for all audit firms irrespective of size and client portfolio composition? • EU: thresholds for mandatory statutory audit vary substantially

13. Current issues & research opportunities in auditing • Audit firm ownership structures • Potential entry barriers to the audit market of large public companies is an ongoing subject of study and debate • Audit firm ownership structures could be one of these entry barriers • Policy-makers (EU, IOSCO, FRC) raise a number of questions: • How important are the existing (and alternative) ownership restrictions to AQ and audit market concentration? • EU interesting setting: Examples of professional services firms with audit practives that use alternative corporate structures

14. Current issues & research opportunities in auditing • Audit firm operating structures • Global audit firm networks: continue to a relevant research topic (Carson 2009) • Well-known and documented gap between ‘international branding’ and ‘actual conduct’ of audits across the world (e.g. Francis and Wang 2008) • Big 4 audit firms are networks of national firms  legal integration • Recently: establishment of pan-European legal entities

15. Current issues & research opportunities in auditing • Audit firm governance • Transparency • EU front runner • Not much is known yet about audit firm governance, auditor behavior and role of transparency

16. Current issues & research opportunities in auditing • Auditor liability • Liability reforms claimed by audit firms • Legal incentives affect auditor behavior • Not much known about costs and benefits of different liability regimes • EU interesting setting: different national liability regimes

17. Concluding comments • All aspects of legal and regulatory environment jointly shape auditor incentives, behavior and ultimately audit quality • Public policy debates provide a lot of inspiration for researchers but…. • ….perform research that can help advance our knowledge on auditing!