Approaches to auditing standards and their possible impact on auditor behavior

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1 Original Article Approaches to auditing standards and their possible impact on auditor behavior Received (in revised form): 28 th July 2010 Jennifer Burns is a partner at Deloitte LLP and former Professional Accounting Fellow at the US Securities and Exchange Commission. Ms Burns focuses primarily on standard-setting issues and other regulatory matters impacting the performance of audits. John Fogarty is a partner at Deloitte & Touche LLP where he is Director of Auditing Standards. He is a former Deputy Chairman of the International Auditing and Assurance Standards Board and a former Chairman of the Auditing Standards Board of the AICPA. Mr Fogarty has participated in a wide range of auditing standard setting and policy activities globally and in the United States over the past 15 years. ABSTRACT The development and existence of appropriate, high quality auditing standards is the first step in the road to quality audits. Auditing standards serve several important purposes including defining what an audit is, promoting consistency, facilitating education, providing a means to judge performance, and, most of all, influencing auditor behavior. Standards also affect many of the other factors that impact auditor behavior such as inspections, enforcement and firm methodologies. Effective audit standards take account of the complex environment that influences auditor behavior and are designed to promote the sound exercise of professional judgment. However, standard setters take different approaches to the development of standards and significant issues related to the role of judgment and to the level of prescription in the auditing standards remain. Audit standard setters have different views of the interplay between the role of standards and how they influence auditor behavior, and this influences the emphasis of the standards themselves. This article discusses the role of audit standards, various approaches used by current standard setters, the advantages and disadvantages of different approaches, and how such approaches may impact audit quality over time. The insights provided are based on professional experience and participation in the standard-setting process. Those involved in activities related to financial reporting, auditing and standard-setting will be interested in reading this article. International Journal of Disclosure and Governance (2010) 7, doi: /jdg ; published online 16 September 2010 Keywords: audit ; quality ; standards ; IAASB ; ASB ; PCAOB INTRODUCTION In today s world, we have various types of standards education standards, environmental Correspondence: Jennifer Burns th Street, New Wales, Washington DC standards, food and drug standards the list could go on and on. Standards, whether they are in relation to independent audits or other areas of life and work, often establish certain requirements and are typically intended to create consistency, comparability and uniformity. As a result, standards also engender an expected level of quality. Audit standards, 2010 Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,

2 Approaches to auditing standards specifically, have been developed over time to describe a desired set of behaviors by auditors to meet the objectives of an audit. Why are quality audits of financial statements important? Quality audits are important not only to the effective functioning of financial markets, but also to the effective operation and monitoring of many enterprises. The purpose of an audit is to provide reasonable assurance that an entity s financial statements are fairly presented in accordance with the applicable accounting framework (that is, that the financial statements are free of material misstatements due to fraud or error). Audits tend to increase the credibility of financial statements, and, accordingly, it is often argued that audits reduce the cost of capital. So how can quality audits be achieved? Although there are many elements that lead to quality audits, the development and existence of appropriate, high quality standards is the first step in the road to quality audits. Standard setters take different approaches to the development of standards even though they have the same objective: to provide high quality standards that support the performance of quality audits. THE PURPOSE OF AUDIT STANDARDS Audits are a collection of judgments about many matters including management s application of accounting pronouncements, adequacy of management s disclosures, scope of the audit, risks of misstatement, materiality, and sufficiency and appropriateness of audit evidence. In the early days of auditing, over a hundred years ago, these judgments were likely based entirely on the knowledge and experience of the auditor. Over time guidelines and standards were developed to promote consistency, to educate and to improve the effectiveness of audits. In addition, the response to significant perceived audit failures has consistently included the revision or addition of standards designed to prevent the same failure from occurring again. This constant look at the adequacy of standards has improved the practice of auditing. And as a result, today we have high quality auditing standards in the United States and at the international level that are the culmination of decades of experience in practice. But often audit standard setters address the perceived audit failures after they have occurred, rather than anticipating the next one. Standard setters should consider putting more emphasis on addressing possible future issues. Auditing standards serve several important purposes including defining what an audit is, promoting consistency, facilitating education, providing a means to judge performance and, most of all, influencing auditor behavior. Auditor behavior is influenced by many factors of which standards are only one. Culture, inspections, enforcement, experience, education, firm methodologies and guidance along with the standards form a complex environment that influences auditor behavior. But it is the standards that set the tone and the basic outline of the judgments and actions that make up an audit. Further, standards affect many of the other factors that impact auditor behavior such as inspections and enforcement and firm methodologies. Effective audit standards take account of the complex environment that influences auditor behavior and are designed to promote the sound exercise of professional judgment within the context of a complex environment. But significant issues related to the role of judgment and to the level of prescription in the auditing standards remain. Audit standard setters take different views of the interplay between the role of standards and how they influence auditor behavior, and this influences the emphasis of the standards themselves. Differences of emphasis in writing standards One point of view is that auditing standards must first and foremost be capable of inspection and enforcement. What constitutes capable of inspection is an open question that revolves around the degree to which inspectors and enforcement agencies believe they can appropriately evaluate and assess 2010 Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,

3 Burns and Fogarty auditors judgments. This consideration may lead to a tendency to write standards that are prescriptive and detailed and become more so over time. Another point of view is that auditing standards must set forth the fundamental principles of auditing and provide latitude for the application of professional judgment. In this way the standards can be applied to small simple entities as well as large complex ones. This point of view often emphasizes the need to limit the number of requirements. This view allows different interpretations of standards depending on, not just variations in the facts, but also depending on the culture, experience and education of the auditor, among other things. The treatment of confirmations provides a simple example to illustrate these points of view. Under a more prescriptive approach the structure might be: The auditor must send accounts receivable confirmation requests directly to customers. If replies are not received, second requests must be made. The auditor must control the receivable confirmation requests by mailing them and receiving them directly. The auditor must test the accuracy of the addresses against independent sources. The auditor must request confirmation of the balance of the account. If no reply is obtained, the auditor must test subsequent collections. If the account has not been collected by the date of the auditor s report, the auditor must perform other alternative procedures to obtain evidence about whether the receivable is valid. And so forth and so on. Not only does this approach require certain specific procedures, but it also includes requirements about how to perform those procedures under various circumstances. Under the principle approach the structure might be: The auditor must obtain audit evidence about the validity of receivables. The auditor may do so through confirmation with customers, tests of subsequent collections, or other alternative procedures appropriate in the circumstances. With this example we can see the advantages and disadvantages of each approach. In the more prescriptive approach the standard setter has to keep adding more procedures to address every possibility. Of course the standard setter will never be able to address every possibility for misstatement in detail. The quest for more rules under a prescriptive approach to address what went wrong may also place too much emphasis on the past and not enough on anticipating what is likely to go wrong in the future. Meanwhile auditors may over time come to think that if they have performed all the procedures identified in the standards, that they have done all they need to do, even if other procedures would be appropriate in the circumstances. Further, over a long period of time under a compliance mindset, the auditor s ability to design procedures appropriate to the circumstances may be undermined. On the other hand, judging whether the procedures have been performed with the prescriptive approach is relatively easy when compared with deciding whether sufficient appropriate audit evidence has been obtained as described under a more principles approach. Table 1 presents some of the likely advantages and disadvantages of each approach. On the basis of these advantages and disadvantages, clearly we should not follow only one approach or the other. A blend of the two is likely necessary for the optimal outcome. The current standard setters all use a combination of these approaches. However, each standard setter tends to lean toward one approach more than the other. Overall, standard setters should consider the long-term effects of how standards are written as well as the impacts of the writing style on short-term implementation. In the short term, there may be a good understanding among the auditing profession as to why certain prescriptive Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,

4 Approaches to auditing standards Table 1 : Advantages and disadvantages of a prescriptive and principle approach Approach Advantages Disadvantages Prescriptive Greater consistency in application Facilitates objective inspection and enforcement Easier to teach and apply Helps avoid past mistakes Rules may never address all circumstances Rules may undermine the auditor's ability to design procedures May create mindset that the procedures identified are sufficient in all cases May lead to more focus on addressing past issues and insufficient focus on anticipating new issues May create a focus on compliance and documentation at the expense of intuition and seeking evidence appropriate to the risks and circumstances Principles Re-emphasizes the mindset that the auditor is responsible for the design of procedures appropriate to the circumstances rather than simply following the identified procedures Applies broadly and will not need constant modification and addition May better allow for anticipation of future issues Less consistency in application May lead to insufficient audits owing to inadequate audit procedures May make inspection and enforcement more difficult and dependent on subjective judgments requirements exist and the intended objective behind the requirements, such that the auditor may be able to assess the situation and modify or add to the procedures as needed. However, over long periods of time, this understanding may fade and the identified procedures in the standards may be interpreted as the sufficient procedures in all circumstances. This absence of judgment could lead to financial statement audit failures due to lack of recognition of changed circumstances, insufficient procedures and inadequate analysis of the facts. Even when standard setters intend the requirements to be a minimum (to which the auditor is expected to add to as necessary) the tendency may be for the auditor to over rely on the completeness of the identified procedures in the standards. Interaction of inspection with standard setting To help maintain quality, audit firms in the United States are subject to external and internal reviews. Quality control standards in the United States require internal inspection of audits. In addition, under the requirements of the Public Company Accounting Oversight Board (PCAOB), audits of public companies are subject to PCAOB inspection. 1 Also, audits of non-public companies in the United States are subject to an external inspection process conducted by other auditors; this process is called peer review. Around the world there is a wide range of inspection approaches varying from none to substantial inspection processes such as in the United Kingdom and Canada. These inspection processes may have a significant impact on auditor behavior. Word of inspection findings tends to travel informally within an organization, and may cause more formal actions such as education or changes in methods or policies. Inspection processes also tend to influence behavior when the standards do not contain a related rule; for example, when some approaches to meeting an 2010 Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,

5 Burns and Fogarty objective are rejected by inspectors and others are accepted. This result may bolster standards that are not specific enough. In other cases this can lead to the same undermining of critical thought that sometimes results from following prescriptive rules. For all these reasons, inspection processes should consider the same issues that standard setting processes do with respect to auditor behavior (that is, if inspections are causing more prescriptive audit procedures and generating a compliance mindset, is that over the long term improving quality?). DEVELOPING HIGH QUALITY AUDIT STANDARDS Various models are used to develop audit standards; and these models are composed of multiple elements including aspects such as funding, independence and transparency, among others. Two important elements of a standard setting model relate to (1) who sets the standards and (2) whether the standard setting process is transparent. Skills and knowledge of standardsetters When considering who should be involved in setting standards, there are typically two approaches. One approach is for the standards to be set by experts people who have extensive direct experience in applying the standards. A second approach is for standards to be set by independent non-expert parties people who are independent from those to whom the standards will apply and have little or no experience in applying or using the standards. Each approach has benefits. The expert approach : Having experts with direct knowledge of the related standards and experience in applying them has a cascading set of benefits. Involving experts allows the deliberations of new standards to be conducted in the context of direct knowledge of the current process. A clear understanding of the current process is important in determining how the process can be improved and changed to meet new objectives. Without understanding the current state of a standard and its current impact, it is difficult to understand why or how a standard should be changed. With an expert panel this well-steeped knowledge exists. With a non-expert panel there is a significant learning curve that would exist to obtain this knowledge and understanding. Arguably, such knowledge cannot be learned through study, but only through experience in execution and application. Also, when experts are involved it is more likely that practical application issues and usability of the standard will be considered and resolved as the standard is being drafted and deliberated. With expert panels, implementation issues are more likely to be identified early in the standard-setting process. The result is that such issues can be resolved before finalization of the standard. This helps to avoid after-the-fact questions and unintended consequences, and as a result, the implementation process is likely to be much smoother. In addition, involving experts helps to develop standards written in a manner that is well understood by those who will be applying the standard. Every profession uses certain terminology and words to communicate and discuss procedures and practices; using consistent terminology is important in communicating the expected behaviors and outcomes. Further, consistent terminology supports the implementation process and helps to ensure that the intended objectives of a standard are met. In summary, involving experts allows for informed decision making, facilitates addressing implementation and application issues as standards are developed, and enhances the understandability of the standard. All of these benefits may lead to avoiding unintended consequences and a more effective and efficient implementation of new standards. The non-expert approach: One of the benefits of having a body of non-experts develop standards is that the process will likely be perceived as Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,

6 Approaches to auditing standards independent. Any question that standards are not being developed in an objective manner could be directly addressed by the fact that the non-experts developing and deciding upon the standards are likely independent from those who will be applying the standards. Another benefit is that the non-experts often may have the perspective of the users of audited financial statements. As a result of the above, the non-expert panel may be more likely to address controversial issues and make significant changes to the standards. This also gives the non-expert panel more of an opportunity to push the needle further in terms of requirements and improving quality in a way that an expert-only panel might not. So what is the best approach as to who should set standards? Likely, it is a combination of both the expert and non-expert models. Expertise is needed to facilitate development of standards that can be applied in practice, implemented in an efficient manner and meet the intended objectives. Independent non-experts are also needed because they provide the additional perspectives of users of financial statements. Transparency of the process Transparency in the standard setting process typically may include activities such as: robust public debates among those setting the standards; a public comment process so that those who will be impacted by the standard can provide input and comments; roundtable discussions held by standard-setters with stakeholders participating; other means of creating a public dialogue throughout the creation of standards. Such transparency in the standard-setting process has many positive outcomes. Robust public debates by standard-setters provide stakeholders the opportunity to understand the objectives of the standard-setters in creating new standards, which in turn contributes to more effective implementation of a standard. The ability to listen to the basis for decisions in the standard-setting process often results in a better understanding of the reason for a change, the change to be made and how to best make the change to meet the intended objectives. Further, understanding the thoughtprocess behind a new standard and the intended outcomes allows stakeholders to anticipate and prepare for changes and, therefore, contributes to effective implementation of the changes. This in turn contributes to higher quality audits. A public comment process and roundtable discussions provide a venue through which the standard-setter can gain valuable insights from all parties that will be impacted and contributes to a more effective, higher-quality standard. Insights gained through the public comment process or at roundtables are likely to provide practical implementation issues, raise points of confusion and / or point out challenges in meeting the overall objectives. Learning about and addressing such issues before finalizing a standard is important to the effectiveness of a new standard. By contrast, a closed process may hinder the understanding of new requirements and hamper the implementation process. Current standard setters and their processes There is one global audit standard setter and many at the national level. Some of these standard-setting bodies are regulatory in nature, while other standard-setting bodies are led by the auditing profession. And others include a combined body of professionals, academics and other interested parties. Many national standard setters tend to use the International Auditing Standards in whole or in part in setting the national standards. International Auditing and Assurance Standards Board (IAASB) The IAASB creates auditing standards at a global level for the performance of all audits of financial statements including public, private and governmental entities. The standards cover 2010 Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,

7 Burns and Fogarty audits of very small and simple entities as well as the largest and most complex entities. These standards are used in various countries under essentially three approaches; adoption, use as a base, harmonization. Adoption may be as simple as the government specifying the standards of the IAASB to be used. Adoption may also take the form of formal adoption processes for each standard (auditing standards of the IAASB are called International Standards of Auditing, ISA). Such a process may result in additions to ISAs for use in the jurisdiction. This is commonly known as the ISA plus approach (or using the ISAs as a base). In a few instances, a government may delete requirements of an ISA upon adoption. This may result in an audit conducted under standards not complying with ISAs, creating inconsistencies across jurisdictions. Such circumstances may not affect all audits in a jurisdiction, however. Some jurisdictions are working toward harmonization. In these jurisdictions standard setters consider the ISAs in setting their own standards and seek to minimize differences, hence harmonizing, but do not necessarily have standards that comply with the ISAs. The IAASB is funded by the International Federation of Accountants (IFAC), which is funded by the accounting profession. The IAASB has 18 members half of whom are non-practitioners including the full time chairman. Of the practitioners, five are nominated from large accounting firms and four are nominated by member bodies of IFAC such as the American Institute of Certified Public Accountants (AICPA). The IAASB also has several non-voting observers who have speaking rights. Currently these are representatives from the European Commission and the Japanese Financial Services Authority. The IAASB has a rigorous due process that includes exposure of proposed standards for public comment and detailed consideration of comments received. Board meetings take place four times a year for 4 5 days. All such meetings are open to the public and agenda papers are available to the public on the IFAC website ( ). The IAASB has a dedicated staff and a staff director devoted to the standard setting process. Projects are led by task forces made up of staff, board members, technical advisors to board members and other persons as needed. Each task force has a chair who usually is an IAASB member. The task force is responsible for the project and the drafting. The task force chair leads the discussion of the topic at the IAASB meetings. The IAASB receives advice and counsel from its Consultative Advisory Group (CAG) on its agenda and each of its projects. The CAG is made up of investors, regulators and preparers of financial statements and has an independent chairman. The work of the IAASB is overseen by the Public Interest Oversight Board (PIOB). The PIOB oversees the public interest mission of the IAASB including its terms of reference, agenda and due process. With respect to the latter, the PIOB must approve the due process for each standard. The PIOB is nominated by regulatory bodies and international institutions. A PIOB member observes all IAASB meetings. The IAASB was created as result of reforms agreed to by IFAC and various regulatory groups and international institutions. These reforms were designed to address concerns that the previous international audit standard setting body was not sufficiently independent of the auditing profession to be seen to be acting in the public interest. Although the ISAs are widely viewed as high quality standards being set in the public interest, some continue to have concerns about the level of participation of members of the auditing profession on the IAASB and that the funding for the board comes from IFAC. The ISAs combine principles and rules in a structure that begins with the objective of an audit, the overall objective of the auditor, objectives of the auditor for each standard, requirements that support achievement of the objective and application guidance for the requirements Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,

8 Approaches to auditing standards This structure provides both principles (the objectives) and rules (the requirements) in an organized way that contributes to sound application of professional judgment to achieve the objectives. The ISAs tend to avoid detailed and prescriptive requirements. ISAs contain material specific to governmental entities and to audits of small- and medium-size entities. There is no global inspection or enforcement process related to audits. Each jurisdiction has its own approach to inspection and enforcement. In some cases there is little or no external inspection. In others a process of peer review by other auditing firms is used. In other cases regulatory bodies conduct inspections. The IAASB has no formal means of receiving feedback from inspection processes. But some of its members have knowledge of inspection results through their organizations. Auditing Standards Board (ASB) The ASB creates auditing standards for audits of all entities in the United States except public companies. The ASB standards are called Statements of Auditing Standards (SAS). Currently the ASB is in the process of a complete revision of their standards called the Clarity Project. This Project will update the standards and use the ISAs as a base. Upon completion of the ASB Clarity Project ASB standards will use the same structure as the ISAs. The clarified SASs will contain all the requirements of the ISAs and retain some additional requirements. At the end of the Clarity Project, there will likely be one requirement of the ISAs that the SASs will not include; the ISAs prohibit a division of responsibility between different auditors who audit parts of a consolidated group. In accordance with long standing practice in the United States, the ASB will likely retain the option to divide responsibility. This difference would only affect those audits where the principal auditor decides to make reference to the work of another auditor. The ASB Clarity Project is expected to be completed by January The ASB is funded by the AICPA. The ASB has 19 members all of whom are volunteers. Three ASB members are non-practitioners (one is an academic, one is a lawyer and one is a banker). In addition, there is one member of the ASB from a state auditor organization. A representative of the US Government Accountability Office is an official observer. Both large and smaller accounting firms are represented. Five members are nominated by the National Association of State Boards of Accountancy. Like the IAASB, the ASB has a rigorous standard-setting process. All proposed standards are subject to public comment and comments are considered in detail. The ASB meets five or six times a year for 3 4 days. All meetings are open to the public and agenda papers are available on the AICPA website ( ). The ASB has a dedicated staff and operates using a task force approach similar to the IAASB. Unlike the IAASB, the ASB has no advisory group or PIOB oversight. A representative of the Securities and Exchange Commission (SEC) typically observes the ASB meetings. Like the ISAs, the SASs combine principles and rules in a structure that begins with the objective of an audit, the overall objective of the auditor, objectives of the auditor for each standard, requirements that support achievement of the objective and application guidance for the requirements. This structure provides both principles (the objectives) and rules (the requirements) in an organized way that contributes to sound application of professional judgment to achieve the objectives. The SASs tend to avoid detailed and prescriptive requirements. Also like the ISAs, the SASs contain material specific to audits of governmental entities. The AICPA has an external inspection program using a peer review approach. The results of such peer reviews are considered in the development of standards. The ASB members have significant experience and knowledge of auditing and work closely together in the task forces and board meetings to develop sound standards that are 2010 Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,

9 Burns and Fogarty in the public interest. However, some criticize the ASB because it is mostly active practitioners and is funded by the profession through the AICPA. The PCAOB The PCAOB was created by the Sarbanes Oxley Act of 2002 (the Act) in the wake of the Enron and WorldCom scandals. The PCAOB has the authority to register public accounting firms that audit public entities (registration is required for all firms that audit US public companies), set auditing standards for audits of public companies and audits of non-public brokerdealers, conduct inspections of registered firms and enforce its rules for registered firms. The PCAOB is an independent organization, overseen by the SEC, and is funded by fees charged to public companies and registered firms; starting in 2010, brokers and dealers (as defined in Sections 3a(4) and 3(a)(5) of the Securities Exchange Act of 1934) will also begin paying such support fees. The PCAOB has five members including its chairman, and they all hold full time positions. Under the Act, PCAOB members are to be prominent individuals of integrity and reputation who have a demonstrated commitment to the interests of investors and the public, an understanding of financial disclosures required of issuers under the securities laws, and the obligations of accountants with respect to the preparation and issuance of audit reports. Two members of the Board are required to be CPAs, and if one of those two members is the chairperson, he or she may not have been a practicing certified public accountant for at least 5 years before his or her appointment to the Board. PCAOB members are appointed by the SEC, after consultation with the Chairman of the Board of Governors of the Federal Reserve System and the Secretary of Treasury. The PCAOB has a rigorous standard-setting process as well, and all proposed standards are subject to public comment. The PCAOB s Chief Auditor is responsible for drafting standards. The Chief Auditor has a staff composed of persons who have auditing experience. No practitioners participate in the process of writing the PCAOB standards. PCAOB meetings take place in public and in private. Public Board meetings occur at the discretion of the Board and generally last about 2 hours. Typically the public Board meetings occur to approve the issuance of an exposure draft or to approve a standard as final. During these meetings, the staff makes a presentation in which they discuss the basis for the proposal or final standard followed by questions from the Board members. These meetings typically involve high level discussions and do not include debate among the Board members or the staff. Of course, these meetings are only a small part of the process undertaken internally at the PCAOB to draft standards. But these meetings are the only part visible to the public. The format of the PCAOB standards has evolved over time, and continues to evolve. Exposure drafts and final standards are accompanied by a release that includes some information regarding the basis for certain conclusions and reasoning of the Board and staff behind the requirements of the standard. This material may serve to some degree as application guidance. PCAOB standards generally have an objective, requirements and some explanatory material. They tend to have more requirements than the ISAs or the SASs and the requirements are often more prescriptive and detailed. Generally, there is less application guidance. The standards also contain a highlevel comparison with the requirements of the ISAs. Like the IAASB, the PCAOB has an advisory group that provides advice on auditing and related professional practice standards. It is called the Standing Advisory Group (SAG), which consists of academics, auditors, investors, public company executives and others. The SAG meetings are usually open to the public, and generally last 1 or 2 days. The standard setting agenda as well as topics under consideration for standard setting are reviewed with the SAG. After comments on proposed standards Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,

10 Approaches to auditing standards are received and analyzed, the SAG receives a report from the PCAOB staff of the comments. The SAG does not review the text of standards in process; but SAG members can review exposure drafts that are public and participate in the public comment process. The PCAOB also has an Investor Advisory Group in order to receive direct input from the investor community on a variety of issues including standards. The PCAOB is overseen by the SEC in all of its activities. With respect to standard setting, the SEC must approve all standards for them to become effective. The SEC approval process also typically includes public exposure and comment. The PCAOB also conducts inspections and enforcement. The results of inspections and enforcement activities provide important input to the standard setting process to identify areas where improvement may be needed. Some view this as a unique strength of the PCAOB. In addition, some view the PCAOB processes as superior to others because it is independent of the profession. Others view the PCAOB s processes as insufficiently open and very lengthy. CLOSING High quality auditing standards promote auditor behavior that contributes to effective audits. Standard setters should consider promoting the sound exercise of professional judgment rather than attempt to provide instructions for every circumstance. Further, standard setters should consider the impact standards have on other factors (including inspections and firm methodologies) shaping auditor behavior. From a regulatory or standard setting perspective, it may be attractive to provide specific instruction with objective outcomes, but care must be taken to support and grow the auditor s ability to make sound judgments rather than to undermine it. Effective standards that assist auditors in identifying issues and making sound judgments support the important objective of performing quality audits. NOTE 1 Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the PCAOB was recently granted authority to also inspect audits of non-public broker-dealers. Disclaimer The views expressed in this article are those of the authors and do not necessarily reflect those of Deloitte LLP or any other organization with which they have been associated Macmillan Publishers Ltd International Journal of Disclosure and Governance Vol. 7, 4,