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14297 Words May 7th, 2013 58 Pages
Does Auditing Matter?

Janice Rhodora P. Carpentero
La Salle University

and

Eljoy Delos Santos
La Salle University

May 22, 2013
Does Auditing Matter?

SUMMARY: The scrutiny auditing has received post-Enron provides compelling evidence that auditing does matter, to answer the rhetorical question posed by the paper’s title. What is unclear, however, is whether auditing was sufficiently “broken” in the first place to warrant the radical reforms and changes effected by the Sarbanes-Oxley Act (SOX). Despite a relatively small number of high profile corporate failures and accounting scandals such as Enron and WorldCom, the number of demonstrated audit failures as evidenced by successful litigation or SEC
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Going forward, should we expect the institutional changes mandated by SOX to improve audit quality? b. The legal system is an important institution that has a major impact on the auditing profession. While SOX does not directly make changes to this institution, it is an open question whether we need the kind of extreme litigation exposure we currently have in the U.S. in order to achieve an appropriate level of audit quality, and we casually note that Canada and Australia appear to have credible auditing without imposing such a brutally litigious environment. Thus, we encourage researchers to address issues regarding the role and importance of litigation in maintaining high audit quality.
3. SOX made changes to several engagement-specific characteristics with the ultimate aim of improving auditor independence. The most contentious change is the banning of most nonaudit services performed by the incumbent auditor. Other changes include mandatory audit partner rotation and a one-year waiting period before auditor employees can accept executive positions with their former clients. We have the following suggestions for investigating the propriety of these changes: a. We believe that the SOX provision that bans most nonaudit services is at best misguided, and at worst politically-motivated. We also believe, however, that there are many important questions not yet addressed by researchers in this area, including the following: Do personal
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