PRACTICE VS. APPEARANCE: UNDERSTANDING REGULATORY ACTIONS AGAINST AUDITORS FOR INSUFFICIENT PROFESSIONAL SKEPTICISM

Abstract

Audit regulators frequently describe that auditors lack sufficient professional skepticism, but practitioners argue that these allegations are unsubstantiated. We review SEC audit enforcement actions (AAERs) and PCAOB inspection findings to understand how regulators evaluate skepticism. Our analysis of AAERs provides evidence of an outcome effect, where regulator perceptions of skeptical behavior are influenced by the results of fraud investigations (e.g. known risks and client misrepresentations). Our analysis of PCAOB inspections suggests that the occurrence of a skepticism deficiency is associated with the number of audit errors identified. Also, inspection findings related to documentation issues, audit opinions, and related parties are associated with skepticism deficiencies. These results substantiate practitioner claims that there is an issue with skepticism in appearance rather than skepticism in practice. This study provides guidance for auditors to more visibly demonstrate skeptical behavior and emphasizes the need for clearer expectations and processes for evaluating skepticism.