PCAOB Research Synthesis Projects —
Past Experiences and Future Directions
By Christine E. Earley, on behalf of the Research Committee
At the Auditing Section Midyear Meeting in January 2007, the Research Committee sponsored a panel regarding the Public Company Accounting Oversight Board's (PCAOB) research synthesis projects. Panelists included Gary Holstrum, PCAOB Consultant to the Chief Auditor (former Associate Chief Auditor and Director of Research), Jean Bedard of Bentley College (representing the research synthesis project related to Audit Firm Quality), Chris Hogan of Michigan State University (representing the research synthesis project related to Financial Fraud), and Robert Allen of the University of Utah (representing the research synthesis project related to Auditor Risk Assessment). Gary provided background and general remarks regarding all research synthesis projects, and each of the three project representatives described the process involved in completing their respective projects.
Gary Holstrum began by outlining the purpose and scope of the research synthesis projects. He explained that several years ago, the PCAOB and the Auditing Section partnered to identify teams of academic researchers to research and provide an analysis of the academic literature related to nine of the PCAOB's major standard-setting projects. These research synthesis teams examined Auditor Risk Assessments, Audits of Fair Value, Engagement Quality Review, Communications with Audit Committees, Audit Firm Quality Control, Financial Fraud, Audit Confirmations, Auditing Related Party Transactions, and the Audit Reporting Model. All nine teams have completed briefing papers, which are available on the PCAOB's website at www.pcaobus.org, and several have papers forthcoming in academic journals. Gary noted that all teams have identified findings from academic research that have proven useful to PCAOB standard-setters.
Jean Bedard discussed the efforts of the research team on Audit Firm Quality. The team addressed eight questions posed by the PCAOB's Standing Advisory Group in June and November 2004. They focused on several aspects of audit firm quality, such as audit firm governance, compensation and reward systems, risk assessment and control mechanisms, monitoring and internal inspections, as well as whether there are reasons to exempt smaller firms from PCAOB quality control mechanisms.
Chris Hogan discussed the efforts by the research team on Financial Fraud. The PCAOB Standing Advisory Group posed 49 questions related to financial statement fraud, and the challenge to this research team was to group the individual questions into manageable themes. The team ended up addressing the following topics; 1) factors that affect financial statement fraud from an organizational perspective, 2) procedures and the ability of auditors to detect fraud, 3) fraud risk assessments and their impact on audit planning and testing, 4) high risk areas, and 5) other matters of concern to the PCAOB (such as interaction with the audit committee, use of forensic specialists, etc.).
Robert Allen discussed efforts by the research team on Auditor Risk Assessment. Bob started by discussing the process followed by the research team, including the project timetable. He noted that the keys to success were to set deadlines, establish accountability among the team's members, determine the scope of the topics to be included, elicit feedback throughout the process, and remain focused on the purpose of the project and the audience to which the team will present its results. Bob then described in detail the ten major insights yielded by their research synthesis.
All presenters noted that the research synthesis process was very rewarding and yielded valuable insights to help the PCAOB standard-setters as well as academic researchers. The teams also agreed that although they found research relevant to each of their assigned topics, there are still many questions left unanswered, and additional research in each of the areas is needed.
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