Chapter 2 - Regulatory Environment

From 1940s to 1960s n profession at its peak n

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From 1940s to 1960s n Profession at its peak n Reliance on test of controls increases n Sampling is refined n Introduction of analytics
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+ CPA Profession’s History n 1950 – uniform CPA exam across the country n CPAs – prominent figures in society n 1960 – “Big Eight” term coined out by an article in “Fortune” magazine n 1960s to 1970s n First scandals n 1972 Department of justice removes ban on bidding n 1970s to 1980s – low balling n 1989 – Big 8 to Big 6
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+ CPA Profession’s History n 1990s n Focus on analytics n Less test of controls and details testing n Automated audits (checklists) n Steep increase in non-audit services n 1998 – Big 6 to Big 5 n Now – post SOX n Focus on planning n Focus on fraud n Focus on independence n Value of audits rediscovered n Non-audit services prohibited
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+ Firms n Top Tier – Big 4 – KPMG, EY, Deloitte, PwC n Second Tier – Grant Thornton, BDO Siedman n Regional/Local Firms – 1700 firms registered with PCAOB n CPA Firms n Staff n Senior or in-charge n Manager n Partner
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+ Need for Regulation? n Underlying Premise: n Auditing plays a major role in protecting our financial/capital markets and in protecting the general (investing) public. n Requirement: n Auditors must be knowledgeable, objective, and ethical. n Conditioned Response: n The auditing profession must be regulated!
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+ Regulation of the Auditing Profession: What are the Objectives? n To preserve the integrity of the profession. n Auditing only adds value to information if it has integrity. n The public cannot see "inside" the audit. n Dilemma: n The more integrity an auditor has, the more he/she can hurt the public by behaving badly, and in a world of billions of people, with conflicting motivations, there will always be someone...
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+ Options for Regulation n Self Regulation n American Institute of Certified Public Accountants (AICPA), its predecessors, and its committees (e.g., ASB). n A lot of good stuff...! n GAAS; Code of Ethics; Assurance Standards; Compilation & Review Standards; Quality Control Standards; CPA exam; Training (CPE); Discipline n But some not so good stuff...? (please note the “?”) n Prohibitions on advertising, price competition, solicitation. n Domination by a few firms. n Audit failures. n Preliminary Conclusion: n The auditing profession has done an excellent job of regulating itself and adapting to changes in the world...however, there is always the lingering question of whether the regulators serve the public or they serve themselves!
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+ Options for Regulation n Government regulation in it's various forms (SEC, GAO, PCAOB, other) n Pluses: n Independent perspective n Clearly represent the public n Legal clout n Minuses: n No cost/benefit thresholds n Political process n Lack of understanding n Preliminary Conclusion: n The government may solve some problems, but may cause other problems in the process. It is not clear that government
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+ Regulation Structures
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+ AICPA (as per website mission)
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