Books and more books are stacked on shelves and in piles around the office of Accountancy Department assistant Christine Nolder. But there is one she keeps close at hand: a tattered paperback copy of The Philosophy of Auditing, published in 1961 by the American Accounting Association.
On page 29 is a metaphor that Nolan finds apt in considering the tensions between the Public Company Accounting Oversight Board (PCAOB) and public auditors. According to the classic monograph, an audit is not like a chain that becomes worthless if any single link appears weak. Instead, the book compares an audit to a bundle of sticks, able to retain strength even if one stick is weak or broken.
“There’s a discrepancy between what PCAOB inspectors and auditors perceive as sufficient auditing,” says Nolder, a Bentley PhD candidate who serves as assistant to the Accountancy Department chair. “Both sides need to understand and resolve their differences, to preserve the effectiveness of future audits.”
Deficiencies vs. Disagreements
The PCAOB emerged from the Sarbanes-Oxley Act of 2002 and has a variety of duties. Nolder is focused on the board’s charge to “audit the auditors” via annual inspections. Specifically, PCAOB officials examine a sample of audit working papers from public accounting firms that perform more than 100 public company audits per year.
Inspectors comb through the data and identify “audit deficiencies.” These represent compromises in the audit that, to PCAOB inspectors, cast doubt on whether auditors had sufficient, competent evidence to support their audit decision. Deficiencies that are not resolved within a certain time frame are publicly disclosed on the PCAOB website, with an addendum noting the company’s response.
“In the majority of cases,” Nolder says, “firms strongly disagree with the PCAOB and believe they have provided appropriate evidence to support their audit opinion.”
Nolder is studying the cognitive variables that drive an auditor’s decision to perform or not perform necessary audit procedures.
“The operative word is necessary,” she explains, noting that the types and extent of audit procedures performed are judgment calls likely to vary even among auditors themselves.
PCAOB inspectors often attribute deficiencies to the lack of a “professionally skeptical attitude” by auditors. That is, throughout the process, auditors should be alert to audit evidence that contradicts or questions the reliability of documents supplied by the client.
What Were They Thinking?
Nolder is using attitude theory to create a model that depicts auditors’ thought processes in choosing audit procedures. Her preliminary work suggests that a professionally skeptical attitude plays a smaller role in audit procedure choices than one might expect. Instead, it is culturally derived perceptions of risk and its consequences that account for most judgments and decisions made during an audit.
“PCAOB inspectors and auditors have very different cultures,” she says. “So it’s not surprising that their perceptions of necessary audit procedures would vary.”
Nolder’s ultimate goal is to understand what lies at the root of audit deficiencies. Do they represent compromises in audit quality? Or are they the byproduct of differing judgment calls by auditors and inspectors?
“Since firms often penalize audit partners for deficiencies discovered during their engagements, my fear is that auditors may adapt their procedures to what they think PCAOB inspectors want,” she says. “And that’s not necessarily what is best for the effectiveness and efficiency of the audit.”
A native of Easton, Penn., Nolder earned her BS in Accountancy from Bentley in 1990 and added an MBA in 2001. She will be the university’s first “Triple Falcon” upon finishing her PhD in Accountancy.