Although the audit engagement quality review will soon be subject to new rules, it has not been a common target for enforcement action, according to a recent academic analysis.

Since 1993, only 28 enforcement cases at the Securities and Exchange Commission or the Public Company Accounting Oversight Board have resulted in sanctions against the audit partner in charge of the quality review, according to the analysis. Of those only eight arose from one of the major international audit firms. “It’s surprising to me that there weren’t more,” said William Messier, accounting professor at the University of Nevada, Las Vegas, who led the research.

The SEC began calling in the 1990s for more rigor in the engagement quality review, which audit firms perform internally to review their own audit work before issuing audit reports. The PCAOB is revising the rules with a proposed new standard that would generally require the engagement quality reviewer to take a closer, more skeptical look at the audit engagement team’s work.

In the handful of cases since the early 90s that led to enforcement, engagement quality reviewers typically relied too heavily on management’s representations without obtaining corroborating evidence, the research showed. They also commonly made bad calls around materiality or failed to show enough skepticism, Messier said.

Too often, the research shows, the reviewing partner overlooked unresolved audit issues, didn’t require enough additional audit work, or relied too heavily on the audit team or management. In about half of the cases, the sanction against the reviewing partner involved denial of the right to practice before the SEC or PCAOB for three or more years.

Messier said the PCAOB’s proposed new standard on engagement quality review provides more specific guidance on what’s expected of the engagement quality reviewer, which should address some of the shortcomings that have led to sanctions in the past. “No standard is foolproof,” he said. “But the new standard should help improve engagement quality review and reduce the kinds of actions that have occurred in the past.

Although the research offers insight into where quality reviews have gone wrong in the past, it doesn’t answer any question about why the number of enforcement cases is low, Messier said.

Topics