The Real Effect of Authoritative Regulatory Guidance and Attestation Standards: Evidence from Financial Advisor Misconduct

• In Event: Auditing

Abstract

Financial advisors serve as primary gatekeepers to the financial markets for non-professional investors and financial advisor misconduct in the broker-dealer industry has real and direct negative effects on investors. Yet given these effects, broker-dealers and auditors who tolerate financial advisor misconduct persist in the market. This study utilizes the PCAOBs the initial issuance of authoritative regulatory guidance and attestation standards for audits of broker-dealers to investigate how audit guidance is associated with financial advisor misconduct. We find that the issuance of authoritative regulatory guidance and attestation standards is associated with a reduction in financial advisor misconduct and that relationship is stronger for smaller broker-dealers, smaller auditors, and auditors who may have been ‘specializing’ in tolerating financial advisor misconduct. We also find that guidance and standards are associated with better internal control outcomes, increased auditor independence and higher financial advisor turnover for advisors who commit acts of misconduct. These results suggest PCAOB guidance and standards have had a positive impact in reducing the levels of financial advisor misconduct within the broker-dealer industry.

Authors

• Rui-Zhong Zhang, Kent State University

• Rachel Peng, University of Dayton

• Russell Williamson, University of Louisville