A Proposed Model to Measure the Impact of Applying PCAOB Requirements to Reduce Inspection Risk in Egyptian Audit Firms: An Experimental Study

Abstract

Confidence in public company financial reporting is essential to the strength of securities markets. Company management, audit committees, and internal and external auditors are playing vital roles in providing investors with reliable information through financial reports. These roles are enforced in USA by regulators, including the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB or Board). Congress created the PCAOB to protect the public interest, especially investors by monitoring the work of audit firms that audit public companies. The PCAOB is a private regulatory agency, independent of the accounting industry. It was designed to oversee the auditors who audit public companies, to protect the interests of investors, and further the public interest in the preparation of informative, fair, and independent audit reports. There are four primary areas of responsibilities for the PCAOB: First, Register all audit firms that audit public companies whose stock is traded on any U.S. exchange. Second, Establish auditing standards related to the preparation of audit reports of public companies for those registered firms to follow. Third, Conduct periodic inspections of those registered audit firms and report the results of those inspections. Fourth, Impose a range of sanctions against registered audit firm when there is a suspected violation of the PCAOB’s standards or other applicable rules. In anticipation of the PCAOB inspections, many firms are taking proactive steps to better manage audit quality and in the same time to reduce the inspection risk. Stefaniak, Houston, and Brandon (2017) defined inspection risk as ‘‘the risk that an auditor or audit firm will suffer harm as a result of a Post-Audit Review (PAR)’’, and they contend that because both PCAOB inspections and Internal Quality Review (IQRs) can yield negative consequences for auditors, then both PARs increase inspection risk. Stefaniak et al. (2017) further asserted that auditors’ perceived inspection risk is incorporated in overall engagement risk because PARs introduce risks associated with auditors’ business risk, independent of risks reflected in the audit risk model, and consistent with the definition of auditors’ business risk (i.e., PCAOB inspection and IQR can harm auditors even if the underlying audited financial statements are presented fairly).