Understanding the economic role of auditing standards is essential for improving audit effectiveness and efficiency. In fact, auditing standards are most important when an auditor may have an incentive to under-audit. However, the conditions under which standards may, or may not, have a desirable effect on audit quality are less obvious.
A recently-completed research paper discusses what standards
can do: (1) compensate for the lack of observability of the audit outcome by
focusing on the audit process; (2) partially mitigate the information advantage
possessed by the auditor as a professional expert that might motivate the auditor
to under-audit; (3) counterbalance the diversity of demand across multiple
stakeholders that might drive the audit to the lowest common denominator and
create a market based on adverse selection; and (4) provide a benchmark that
facilitates the calibration of an auditor’s legal liability in the event of a
substandard audit.
The paper also presents a number of observations about what
standards should not do: (1) discourage the use of judgment by auditors; (2)
limit the potential demand for economically valuable alternative levels of
assurance; (3) lead to excessive procedural routine or standardization in the
conduct of the audit; and (4) be based on an enforcement agenda. In the end,
standards overreach may undermine the economic value of the audit to many
stakeholders and lead to fee pressure for audit firms.
Hopefully, these insights can inform future debates about
the level and types of standards that are appropriate for the auditing
profession. For more information, read the article “Do Auditing
Standards Matter?” by W.
Robert Knechel, PhD, University of Florida. This manuscript has been
accepted for publication in an American
Accounting Association (AAA) journal. The author has posted this
preliminary version of the manuscript in the interest of making the information
available for distribution and citation on a timely basis.
