CPA Annual Research Lecture 2020: Stephen Taylor - Q&A

Questions which were not answered during the live Q&A session have been responded to by Professor Stephen Taylor, UTS below.

Click each question to view its answer.

I agree - the focus needs to be on auditor competence at all levels (tertiary qualifications, professional qualifications and continuing education). The independence argument gets way too much weight.

I do not know what NAS growth explains the overall increasing proportion for the Big 4. There is also some confusion here over what is audit-related and what is NAS. Only the US has really clear rules around what cannot be provided, although obviously the general independence rules here restrict auditing one's own work (such as preparation related assistance).

There is a limited amount of (US) research on KPIs and their effects - we are currently studying how non-GAAP earnings metrics are incorporated into bonus plans here in Australia. It seems that most CEOs now have multiple KPIs, which makes attributing any "effect" to one a more problematic approach. I would characterize existing accounting and finance research as basically showing that in terms of alternative KPIs, "you get what you pay for".

I don't have a strong view one way or the other regarding the timing of the recommendations from the PJC. I am really not sure they will make much difference though. However, being able to conclusively show whether audit committee characteristics impact audit quality (and the quality of financial reporting) is challenging.

I think that the incentives faced by regulators and especially politicians (get re-elected) make rational decision making rather hard. For example, use as an example the practice of making new road laws (bigger penalties) every time a (probably wet) Xmas or Easter holidays is associated with a sudden jump relative to recent years in accidents/casualties. No one ever addresses driving standards/instruction - the effects are too long term.

I am writing up a paper for AAR based on the lecture. I agree it is not easy to get research more front and center in this respect - some of it is our own fault but not all.

I wasn't aware of the Canadian situation you mentioned but am chasing this up with a few colleagues over there who should no more. But in principle it is a good suggestion - the best evidence on proposed rules/legislation is evidence on what happened elsewhere when the "same" thing was implemented. Not often that this is readily available - lots of changes tend to occur over a short time period meaning you don't get the chance to provide evidence from country A before country B adopts.

It is easy to see the direct cost of tendering - look at the fee. However, I don't agree that it is therefore easy to see the overall cost - I think that the fee misses the internal client costs dealing with a new auditor which may be substantial but cannot be externally observed by researchers. The benefit is (I agree) hard - we have some ways of trying to capture benefit from higher audit quality but most of these lack reasonable power and have many issues. easy to see the problem, but am not sure of the answer!

What are the primary categories of these NAS? Financial advisory services? Taxation services? IT consulting? Others? Where does the increase in NAS revenue of big 4 come from?

Has there been research into the failure of corporate governance particularly around executive KPIs and failure of the board to properly oversee these contributing to corporate failure? Thinking of Thomas Cook here.

What are your thoughts on rushing the audit committee interim recommendations through due to Covid-19, rather than continuing with hearings?

To what extent is evidence always going to play second fiddle to the need for regulators and politicians to respond quickly to the demands of the 'baying crowds' at times of crises?

Following on your call for evidence based regulation, which I fully endorse, what more can we do to make evidence (analytical and empirical) more consulted by regulators and legislators (timing, translation from academic writing, recognised as relevant, etc)?

Here's a suggestion of where I think some evidence would be great to collect - what has been the result of the Canadian experience of comprehensive review of audit/auditor every 5 years ...adopted there as a measure in preference to mandatory firm rotation?

Compulsory tendering increases costs - is there a marginal benefit is the question?