Public Oversight of Audit Firms: The Slippery Slope of Enforcing Regulation

• In Event: Oversight

Abstract

This study provides evidence of audit firms’ reactions to the actions of an oversight regulator. We adapt the slippery-slope framework (Kirchler et al. 2008) to the audit environment. The slippery-slope framework provides a conceptual tool for understanding how the perceived actions of a regulator influence how a regulatee complies with regulation. We use our adapted framework to analyse data collected from interviews with regulators and Big 4 and mid-tier audit partners. In this study, the regulation of interest is compliance with principles-based auditing standards. We find that as the oversight regulator strengthened their enforcement strategy an antagonistic (rather than synergistic) compliance climate emerged. An antagonistic climate is where the regulator and the regulatee hold divergent views of the optimal methods of achieving compliance. As the regulator’s exercise of power became increasingly coercive, audit firms responded by embracing rules-based technologies, such as checklists, to operationalize principles-based regulation. Although these technologies increase the visibility and auditability of the audit process, this response has potential risks for audit quality and the long-term epistemological evolution of the audit profession. Our study provides important insights into how the relationship between audit firms and oversight regulators influences how regulation is operationalized in audit practice.

Authors

• Carlin Dowling, The University of Melbourne

• W. Robert Knechel, University of Florida

• Robyn Moroney, Monash University, Caulfield