A Study on the Perceptions of Australian Regulatory Reforms to Audit Keith A Houghton Australian National University Christine Jubb Australian

National University and Michael Kend RMIT University November 2010 Draft only: Please do not quote without permission. The paper has not been submitted elsewhere. Acknowledgements: Thanks to Prof. Juliana Ng ANU, Chris Ikin, ANU, and Pat Barrett, Senior Fellow, Australian National Centre for Audit and Assurance Research, Australian National University, for helpful comments received and funding and other support via an ARC Linkage Grant with Deloitte, Ernst & Young, KPMG, PriceWaterhouseCoopers, The Institute of Chartered Accountants in Australia and CPA Australia. Address for Correspondence: Michael Kend, School of Accounting, RMIT University, Melbourne VIC 3000 phone: +61 03 9925 1454, email: michael.kend@rmit.edu.au A Study on the Perceptions of Australian Regulatory Reforms to Audit ABSTRACT Using qualitative interview data, this study reports on the perceptions of auditors, auditing standard setters and regulators in relation to the CLERP 9 reforms to the Australian auditing regime. It contributes to the literature by examining the attitudes of these groups of stakeholders to the

reforms in terms of the cost of implementing revised auditing standards, including the increased documentation required by the standards, the impact on auditor judgement of what many see as increasing prescription of audits towards a more checklist approach, perceptions of audit firm inspections and the resourcing and expertise of the corporate regulator. A theoretical framework is developed to evaluate whether these reforms are merely symbolic or are perceived to have been the impetus for real, substantive reform. A Study on the Perceptions of Australian Regulatory Reforms to Audit Introduction At a similar time to the collapses of Enron and WorldCom in the U.S., Australia experienced its largest corporate collapse that of HIH Insurance. Other Australian corporate collapses at around the same time included those of One.Tel and Ansett. These collapses, particularly that of HIH, caused great concern. The Australian Government reacted to the collapses by initiating an inquiry into auditor independence (Ramsay Report 2001), calling a Royal Commission to investigate the HIH collapse (Owen Report 2004) and issuing a discussion paper on mooted reforms to corporations legislation (2002). These events culminated in one of the most significant reforms to the Corporations Act 2001 (Cwlth) in its history and major change for the auditing profession when the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (hereafter CLERP 9) became effective from 1 July 2004.

De Fond and Francis (2005), Nelson(2006) and Lennox and Pitman (2009), among others, call for research on whether changes to institutional environments responsible for monitoring audit firms have proven beneficial. The current study investigates the perceptions of auditors, auditing standard setters and regulators with respect to recent audit reforms. It examines what might be labelled as the regulatory expectations gap the gap in expectations between the regulated and the regulator in the context of reforms to the auditing regime. A theoretical framework is developed in the sections below to evaluate whether these reforms are merely symbolic or are perceived to have been substantive. This study uses a multiple methods approach involving focus groups and face to face interviews to elicit the views of key stakeholders in the market for audit services. It forms part of a 2 larger study of the Future of Auditing conducted in partnership with two Australian professional accounting bodies and each of the Big Four accounting firms (Houghton, Jubb, Kend and Ng 2010). In part, this study is a response to the call by Hopwood (2007: 1373) for accounting and auditing research to engage more with the community of practice so that accounting [can] be seen in its full diversity and complexity. The context of major reform to the auditing regime mirrors, but was less radical than, the U.S. Sarbanes-Oxley Act 2002 which was motivated by a similar chain of events, fits with Hopwoods observation that: Accounting practice is still trying to grapple with the backlog of pressures on it to

change and in a world where many of these changes will be mediated by the regulatory authorities, the demand for new more abstract insights into the possibilities for a different accounting craft become ever greater (p 1369). DeFond (2010) calls for research that assists in assessing the impact of regulatory interventions on auditor behaviour. This study provides insights from auditors and regulators as to their reactions to major reforms in the period after their implementation. As such, it contributes to a growing body of academic literature that examines the various impacts of reforms motivated by the corporate collapses of early this century, and the issue of related costs. This literature has been based primarily on U.S. data surrounding the implementation of the Sarbanes-Oxley Act 2002 (SOX) (e.g. Wintoki 2007; Bargeron et al., 2010 on corporate risk taking; Cohen et al., 2008 on earnings management; Lobo and Zhou 2006 financial reporting conservatism, Read et al., 2004 on audit firm withdrawal from listed audits, Cohen et al., 2009 on lower incentive compensation linked to a reduction in risk-taking, Beasley et al., 2009 on audit committees and Cohen et al., 2010 on auditor experiences post-SOX). effectiveness of the costs and benefits of the CLERP 9 reforms in Australia. This study contributes to evidence which assesses the impact and 3 Lennox and Pittman (2009) observe of the U.S. environment that several commentators have cast

doubt on whether the Public Company Accounting Oversight Board (PCAOB) and its inspectors have adequate technical expertise to properly regulate audit firms (e.g., Wallison, 2005). The same type of criticism has been made in Australia of the Australian Securities and Investments Commissions (ASIC) on-site audit firm inspections (e.g. Kerr 2006). In a U.S. context, another criticism has been that PCAOB inspectors are overly critical in second-guessing auditors judgments (Farrell and Shabad 2005). Similar comment has been made in Australia (e.g. Hughes 2008). Palmrose (2006) argues that the PCAOB traded off expertise for independence in its choice of composition. Lennox and Pittman (2009) present evidence consistent with clients failing to find PCAOB inspection reports informative. However earlier evidence suggests that profession-based peer review reports were informative (Hilary and Lennox 2005) with negative reports associated with diminished market share. Gunny and Zhang (2007) report a negative association between earnings quality and the PCAOBs disclosure of GAAP violations (but not with peer review reports). Casterella, Jensen and Knechel (2009) document that unfavorable peer review opinions are associated with diminished actual audit quality in terms of overworking of audit staff and the acceptance of risky clients. Overall, there is discontent with regulatory change that is perhaps dictating to auditors what they should or should not be doing within their own judgment domain and their professional tasks. The CLERP 9 reforms also affected auditors incentives (DeFond 2010) because they imposed much

heavier fines than previously, plus possible jail terms for breaches. Also the CLERP 9 amendments resulted in greater regulation of audits by a statutory authority (ASIC) and auditing standard setting being transferred from the profession to a statutory body, the Auditing and Assurance Standards Board (AUASB), as occurred in the U.S. with movement from the AICPA to the PCAOB. This study seeks to draw conclusions as to whether the profession is resistant to these reforms rather than displaying acceptance of them and whether the existence of a regulatory expectations gap has been 4 Soon after revising auditing standards as a result of these CLERP 9 requirements in 2006, the Auditing and Assurance Standards Board (AUASB) had to prepare to adopt the revised Clarity structure and reissue the standards, based on the International Auditing and Assurance Standards Boards (IAASB) clarity project. In October 2009, the AUASB finalized its set of 41 revised auditing standards branded as the Clarity project (McAlery 2010). The Clarity Auditing Standards (ASAs) conform to the Clarity International Standards on Auditing (ISAs) with minimal amendments made by the AUASB (McCabe and Dillon 2010). This study of stakeholder reactions to, among other things, revisions to the ASAs for the force of law, will provide evidence useful in later assessment (not in this study) of the adoption of the Clarity ASAs. Research has indicated that the profession expected an increase to the cost and expense of audits, and a CPA Australia report 2006, Perceptions of Audit Reform found that 75% of respondents

expected the time needed to complete audits to increase, while 80% indicated the updated standards would improve audit quality (McCollum 2006). perceptions of suppliers, regulators or standard setters that the change in the regulatory regime and, in particular, the legal backing of auditing standards, is expected to enhance the quality of the audit product or enhanced the efficiency of the capital market. There is evidence from interviews with suppliers of audit services of resistance to the reforms rather than acceptance. Evidence of the expected cost impacts of the reforms adds to the literature that has called for research that assists in assessing the impact of regulatory interventions on auditor behaviour. However, we find no evidence from the In the next section we convey some of the reforms to the auditing regime initiated by CLERP 9 in Australia. Section 3 develops the theoretical framework used to explain and evaluate the results. Section 4 explains in detail the approach used in this study and its participants. Section 5 analyses and interprets the responses of the participants to this study and discusses the implications of their perceptions. Section 6 provides concluding remarks. 5 2.0 CLERP 9 Reforms and Relevant Literature The principal CLERP 9 audit and audit-related reforms in 2004 related to enhanced auditor oversight and independence. Briefly, the reforms included: i) introducing a general requirement for auditors to be independent under the Corporations Act, ii) incorporating in the Corporations Act

constraints to the employment of auditors by clients and financial relationships between the audit firm and clients, to ensure independence, iii) enhancing disclosure requirements in relation to auditor provided non-audit services, iv) prohibiting audit firm partners who were directly involved in an audit from becoming directors of the audited client within two years of the auditor resigning from the audit firm, v) establishing auditor independence oversight, vi) giving legal backing to auditing standards through the Corporations Act, and vii) reconstituting the board responsible for the setting of auditing standards to make it a statutory board and distance it from professional coregulation (see Jubb and Houghton 2007). ASIC commenced its audit inspection program in 2004-05. The program focused initially on the Big Four and mid-tier audit firms. The program was expanded in early 2008 to include smaller firms, specifically those with listed audit clients (Niven 2009). There is little independent research on the effectiveness of the on-site inspections of the ASIC as a means of monitoring accounting firm quality. Hughes (2008) indicated that there is only anecdotal evidence at this stage on some of the relevant issues. ASIC claims that since its inspections started in 2005 it has noted differences between firms that were inspected for the first time and those subject to a subsequent inspection (White 2008). Academic researchers here and in the U.S. (e.g. DeFond and Francis 2005, among others) have called for evidence on whether major changes in the monitoring of accounting firms, such as these, have improved their audit quality. Most recently the Australian Federal Treasury

released a report in March 2010 Audit Quality in Australia: A Strategic Review, highlighting its view that Australias audit regulation framework is robust and stable, is a key driver of audit 6 quality, and can be considered to be in line with international best practice. While the Global Financial Crisis (GFC) has exposed a number of problems with financial reporting, Australias audit regulatory framework appears to be functioning effectively during the current economic conditions. An exploratory study Hecimovic, Martinov-Bennie and Roebuck (2009) found a lack of support for the Australian Governments introduction of legally enforceable auditing standards (ASAs) as a response to achieve an increase in the quality of audits and public confidence. An analysis of their data indicates significant differences between the expected costs and benefits of the new regime as indicated in the original CPA Australia report and respondents portrayals of their experience after the first year of implementation. The CPA Australia report (2006) captured auditors perceptions of the change phenomenon, Greenwood, Suddaby and Hinings (2002) highlighted the role of the profession in legitimating the change phenomenon, and MacLullich (2003) explored auditor perceptions of themselves in the context of the change phenomenon. However, these studies do not capture the variations in auditor perceptions of the change phenomenon. 3.0 Theoretical Framework In the early 1990s in the U.S. there was a notable shift from an accounting profession that was

relatively free from Federal control to one that was both strongly influenced and regulated by the Federal Government (Granof 1992). Move forward several years and the SOX Act is adopted by the Securities and Exchange Commission (SEC) in 2002 with the purpose to restore public confidence in the markets after the audit failures of the late 1990s and early 2000 period. The SOX Act was a broad-based and complex piece of legislation, forced upon the accounting profession, and as some people view it, a knee jerk reaction to the collapse of several US corporations such as Enron and WorldCom. This change was not initiated by the accounting profession, and the profession needed 7 to respond and adopt the regulatory change that was forced upon it. Some have expressed the view that Congress missed that opportunity for meaningful reform by passing SOX (e.g. Cullinan 2004). Institutional theory proposes that many elements of formal organisational structure, policies and procedures arise as a consequence of widespread societal expectations of what constitutes acceptable practice (Meyer and Rowan 1977). ASIC is a specific administration institution and, like the SEC, takes regulatory actions that establish its own legitimacy. The regulatory efforts of these types of institutions can be viewed as 'political exchanges' that legitimate their actions to an array of external constituents (Bealing, Dirsmith and Fogarty 1996). We focus on one specific regulatory action involving ASIC, the enforcement of the CLERP 9 provisions and the ASIC on-site

auditor inspections. These aspects have parallels with the SOX reforms in the U.S. and the PCAOB inspections but our sample consists only of Australian auditors, regulators and standard setters. Agency theory emphasises directors as independent, vigilant monitors of management; institutional theory emphasises the symbolic/ceremonial role of governance structures where legitimacy is paramount and formal processes are only loosely coupled with true monitoring. Cohen et al., (2010) conducted a study capturing the experiences of auditors and their interactions with audit committees, boards and internal auditors in the post-SOX environment. They conducted semistructured interviews with 30 experienced audit partners and managers from three of the Big 4 firms. Cohen et al., (2010) find that auditors report that the corporate governance environment has improved considerably in the post-SOX era with audit committees that are substantially more active, diligent, knowledgeable, and powerful (support for the agency theory view). However, in some instances governance appears to be symbolic, thus supporting the institutional theory view. Beasley et al., (2009) provide extensive information about the audit committee process obtained through in-depth interviews of 42 individuals actively serving on U.S. public company audit committees. They frame their evaluation of the interviews in part by the tension between agency 8 theory and the institutional theory view. Beasley et al., (2009) find that many audit committee

members strive to provide effective monitoring of financial reporting and seek to avoid serving on ceremonial audit committees. However, within six specific audit committee process areas they find evidence of both substantive monitoring and ceremonial action, that neither agency theory nor institutional theory fully explains. Perhaps one of the most controversial aspects of SOX and the Australian reforms, has been the change away from industry self-promulgation and self enforcement of standards relating to auditing and accounting. There has been evidence of opposition to the PCAOBs responsibility for setting auditing and accounting standards (Hill, McEnroe and Stevens 2005), and several members of the accounting profession have expressed concern that several of the SOX provisions needed to be revisited and revised. Drawing on the sociology of professions literature (e.g. Davis 1996, Parker 2005) under which professionals, such as accountants, are assumed to seek to maintain the judgement domain and indeterminacy of their professional task, it is hypothesised that accountants will not react positively when regulatory change leads to increased documentation and less use of professional judgement. In this context institutional theory has tended to focus on conformity rather than resistance and acceptance rather than political manipulation in response to external pressures and expectations (Broadbent, Jacobs and Laughlin 2001). Greenwood et al (2002) explored the change phenomenon of the Canadian accounting profession over a 20-year period. This change phenomenon was not initiated by the profession. The profession was responding to jurisdictional

and organisational movements of the largest accounting firms. A key result of this research is the role of regulatory agencies, such as professional associations, in legitimating change by theorising change, endorsing local innovations and shaping their diffusion. With ASIC reflecting its self-interest by seeking to establish its own legitimacy to survive, its rule systems reflective of conflicting expectations of regulatory practice (Bealing et al., 1996) will press 9 on any profession that is seen to act in its own interest, and not conform to society's expectations of protecting the public - as auditors are expected to do. Greenwood et als (2002) findings imply that CPA Australia and the Institute of Chartered Accountants in Australia (ICAA), have an important role in promoting regulatory change, such as the CLERP 9 reforms, If they do not strongly do so, then we would expect to find resistance from their members to changes forced upon the profession by political processes, and structures like that which ASIC operates under. This resistance can be expected to be heightened where that change reduces the judgement domain and professional task Face to face office interviews with stakeholders in the market for audit services were conducted as part of a wide ranging project exploring the Future of Audit. Preliminary focus groups of stakeholders helped focus the wider study. An interview protocol for gathering data from face to face office interviews was then developed which, among other things, probed participants on their

perceptions of the CLERP 9 reforms and particularly the provision of legal backing for a new suite of auditing standards which had become operative from 1 July, 2006. Focus groups are particularly useful to explore and generate ideas and issues through group interactions. However, the nature of the focus groups presents limited opportunity to probe issues. In-depth interviews, on the other hand, provide a source of data richness as the researcher is able to enquire further into the complexity of issues. The personal interaction that is required, however, restricts the number of interviews that can be conducted within a reasonable timeframe. By drawing on the strengths of each technique, these multiple methods were the most efficient and effective means of collecting a wide breadth of responses, yet providing a rich and meaningful context within which to tease-out and analyse underlying issues related to materiality, amongst other things. 10 To reflect as wide a range of opinions as possible, opinions were sought from assurance service suppliers, representing both Big Four and non-Big Four firms. Opinions were also sought and received from auditing standard setters and regulators of the market. Focus group participants were primarily drawn from the nominees provided by the industry partners (CPA Australia and ICAA) and were conducted during 2007. Five focus group sessions were held in Sydney (2 sessions), Melbourne (2 sessions) and Brisbane (1 session). All were audio recorded and later transcribed. In total, there were 23 participants, though the numbers of participants in each session varied. Each

session was approximately 1.5 hours in duration, and different approaches were used to elicit responses from participants, including individual assessment and group discussion. These procedures facilitated the identification of relevant issues which were then developed and pursued further during the interviews. The interviews provided an opportunity to probe issues in more depth. In total, interviews with 19 suppliers, and six regulators/standard setters took place. Each interview lasted typically between one and two hours in duration. Given the volume of interviews to be covered, the interviews were staggered across two broad time periods primarily through 2007 in cities such as Melbourne, Sydney, Brisbane and Perth. [INSERT TABLE ONE] [INSERT TABLE TWO] Although there are several qualitative methods, such as the constant comparative method in analysing qualitative interviews (Boeije 2002), thematic analysis (Boyatzis 1998) is used for code development in our analysis of the interview research findings. The process of coding the qualitative information involved listing themes and identifying patterns that casually relate themes and help describe and organise the interview observations. Transcribed audio recordings are coded into themes and using ATLAS.ti qualitative data analysis software, textual patterns are identified from the voluminous set of interview transcriptions to enable conclusions to be drawn from the trends and themes in the data. 11

5.1 Interviewees' Perceptions of Provision of Legal Backing for Auditing Standards Under the CLERP 9 Act (2004), a reconstituted AUASB was created and charged with revising the existing auditing standards such that they could be enforced legally. A twoyear grace period was given from the effective date of the Act until the revised standards became operative for reporting periods beginning 1 July 2006. All of the data that we report on were gathered after this operative date. The AUASB, in revising the standards, elevated much of the pre-existing guidance material, which contained implied obligations, to mandated essential procedures and also downgraded some previous black-letter paragraphs to guidance material. During the grace period and for some time before, the IAASB continued to update and issue its standards, on which the Australian auditing standards are based. Changes in the newly issued AUASB standards were therefore a combination of Australian revisions and IAASB amendments, especially of the risk standards. Amongst other things, the interviews with stakeholders addressed the issue of legally backed auditing standards. Among the suppliers, no-one expressed the view that legal backing for the auditing standards would make a difference to audit quality. [I]f an audit is supposed to focus on the risks then having to do a lot of other stuff around other areas that are no risk doesnt make the audit any better. It might mean its a more pretty filebut I dont necessarily think its going to mean that youre going to identify problems any sooner, any better, anymore frequently than you wouldve under the old system, where you used your judgment. Among the Big Four suppliers, the following was a typical view:

Im looking at it from a Big Four point of view, because we see a lot of clients in a lot of industries. So you do gain a lot of experience and you have [a] bigger, broader base to have that professional judgment. Maybe when youre talking [about] a small firm who dont have the breadth of experience or the depth then it might be a totally different issue. But from a Big Four point of view, I dont think that making them law has helped us particularly. 12 One standard setter alluded to the difficulty of having auditing standards whether legally backed or notcapture the essential skill that creates a good auditor. [T]he concept behind [the legal backing of standards] is that its improved the qualityso that has a flowon effect to the companies, but more importantlyto the ultimate usersthat takes you back to the debate about what is a good audit. When pressed further, the same person continues in response to the observation that the politicianswould say that we wouldnt have done this unless this added value to the market. Why have a law unless it does some good? [T]his is a difficult area because the difficulty here is youre trying to put a level of precision over something which cant be measuredthe really difficult thing is thatreally highquality auditing is about really understanding the issues and the risks and being able totake indicators in places and join them together to actually understand the implications of something before it getstoo far down the road. Hence there is doubt about the ability of auditing standards, whether backed by legislation or not, to encapsulate the essence of a high-quality audit expressed eloquently by this standard setter. Unsurprisingly, the regulators defended legal backing for the auditing standards.

The only difference is if an auditor gets it wrong, its more visible that you can penalise them for thatThats the only difference, but you [could] penalise an auditor previously anywayunder negligence or duty of care because thereve been so many legal cases with auditors. The same regulator argues that the legally enforceable standards require no more audit work than had already been the case: [W]hats changed? Nothing. The only thing is ones been quantified as a legal instrument and then the other case is that was not as enforceable, right, well add another legal path to make them accountable. I dont think its such a big changeWhat worries me is that when the auditor runs the argument [and] thinks the forceoflaw standards make [them] do more work. Now if that means it focuses their mindsprior to that they should have been doing it anyway. 13 While there were remarkably few positive views on the general issue of legally enforceable auditing standards offered by suppliers, standard setters took the view that this initiative was good because it would give rise to improved quality. This is important to companies and the ultimate users of financial statements: the shareholders. There were diverging views about the motivation that gave rise to legally enforceable auditing standards. These views would perhaps not be so divergent if the professional accounting bodies did a better job of selling the story of legally enforceable standards. One regulator indicates this is something the accounting profession wishes to have in order to give substance and support and a more clarified approach than was previously the case. Quality Consequences of the Reforms In the interviews with suppliers, the discussion about regulation elicited many lengthy responses.

The issues that arise under the theme of regulation are extremely intertwined and difficult to separate. Among the suppliers, there was no perception that the level of regulation of audit services would prevent future collapses. Two suppliers mentioned that a focus by regulators on documentation and especially that of a check-list nature was an ineffective approach to regulation that would not prevent corporate collapses: Im not sure that just handing out check lists and stuff to say that we have to fill them out willreduce the amount of corporate collapses anyway. The same supplier goes on to allude to the inappropriateness of the content of the check lists if the prevention of corporate collapse is the aim: [Y]ou dowaste a lot of time in the wrong places because a regulator is going to come in and theyre not necessarily going to know the client. All theyre going to be able to do is look at the form. So you mightve filled out all the forms and totally missed the key risks and issues in a clienttheyre not going to know that. Another supplier believes that the reforms could create a marginal difference in terms of belief in the credibility of financial statements and audit quality: 14 [W]ould it resolve concerns over the credibility of financial statements? I dont think it will resolve them, but it will help a little in that all sides are aware that you have the legal enforceability angle to itin each caseits a marginal difference rather than a quantum leap. Summing up, suppliers are in the main sceptical that the reforms will enhance the credibility of financial statements and improve audit quality, although one or two believe that the general public, but not sophisticated investors, could be of this view. Suppliers have no belief that corporate

collapses will be reduced as a consequence of the reforms, and allude to the fact that the regulators and check lists do not focus on audit issues pertinent to this issue. The suppliers tend to see collapses as a business risk, not an audit risk, and hence view a corporate collapse as not being an audit quality failure. There is questioning of the publics understanding of the meaning of an emphasis of matter section in an audit report. An observation that the public sees the auditor as a regulator is interesting in that at least one regulator is on record as labelling audit as delegated regulation (Knott 2002). Some of the suppliers discussions reveal beliefs about the harm that the collapse of HIH has done to the trust that the public places in auditors, which has been exacerbated by the publicity given to colourful corporate characters. Standard setters are realistic about how much of the reforms to the auditing regime is known to retail investors and how legal backing for auditing standards is but one aspect of the reforms. The first standard setters comment illustrates both of these points: [T]he average offthestreet investor probably doesnt know [about the regulatory changes]. In fact, they probably didnt even know that there were auditing standards before that, [which is] somewhat unbelievable, but if they dont read audit reports, its probably a reasonable conclusion. Another standard setter comments on any enhanced audit quality and the credibility of the financial statements in the following way: [I]ts very, very difficult for ordinary shareholdersto have any real understanding of what happens [in relation to regulation activity]. And how 15 would they? If you havent had any exposure to it, how would you have any real understanding of what goes on?

The same person goes on to imply that although ordinary shareholders might have a low level of understanding of what goes on in the auditing space, directors understanding has improved markedly in recent years: [T]rying to get the directors to understand itis extremely importantthe directors attention anddesire to understand and depth of understanding, has probably increased quite a lot in the last few yearsits still got some way to go. And it obviously varies very much by individualsButit is much better than it was, say, 10 years agothe broader understanding of the process and how far it can really go, how much assurance has really been giventhats come up some notches. Standard setters are at pains to differentiate between the various levels of investor sophistication in the marketplace, which in turn influences knowledge of the reforms to the regulatory regime in an auditing context, especially of their extent and nature, which extends to more than legal backing for auditing standards. In the context of whether the reforms are likely to have enhanced the credibility of financial statements, some positive views are expressed, but these views are qualified. One standard setter notes the importance of the economic fundamentals to public confidence, no matter what the regulatory regime, and the global financial crisis reminds us of how relevant such a comment is. Another standard setter reminds us that changes that create a regime that is more conducive to regulation do not necessarily translate to enhanced audit quality. In summary, regulators are sceptical that the reforms have added to confidence in the capital market and doubt that ordinary people read financial statements, relying instead on analysts who attend

corporate briefings. Of course, under the continuous disclosure regime, briefings to analysts are made public through the Australian Securities Exchange Announcements, but the implication is that ordinary people dont read these either. 16 5.3 Cost consequences of reforms The interviews canvassed the issue of the cost consequences of the regulatory reforms brought in after the corporate collapses in the earlier part of this decade. Suppliers were asked to express their views about the cost implications of the enhanced regulatory regime surrounding audit. Suppliers concede that an increase in costs has accompanied the revised auditing standardswhether or not those costs are capable of being passed on. From the point of view of costsmaking those standards blackletter law [means that] a lot of its become a lot more prescriptive of yourself, so a lot of areas that were like you should do this or you should do that have now become you must do this, you must do that. So, yesIt does add another layer of costs, because ordinarily youd use your judgment to focus on areas of risk and potentially areas that didnt have any risk you could tone down or cut back on the level of workits fairly standard, you could probably get through it pretty quicklyNow, you cant. The minimum level of document[ation] requirement is higher than what it was because you used to be able to use your judgment to decide whether you should do something. Now, irrespective of your judgment, you must do things. Sothe costs will go up. Id like to think that ultimately it doesnt distract the auditors from the objective of the audityou do end up with assurance on the credibility of the financial statementsthe objective is there and the auditors get there. Do they get there by the most perfect critical path? Probably not. Does it add to the cost? Obviously, it must. Is it a massive issue? To listen to my audit colleagues, its getting more annoying, so that the weight of extra cost and burden is higher.

In summary, suppliers comments reveal that some of their clients are more prepared than others to pay increased costs as a result of increased documentation and regulatory requirements. The increased time for administration is clearly sizeable given the comments of some suppliers. Comments reveal that at least some of the increased cost is performing tasks that were previously considered unnecessary given the risks, but which have now become mandatory regardless of the 17 Standard setters provide a broader perspective of the increase in audit costs than the other stakeholders tend to do. Their comments follow. [T]heres no doubt that it heightens the barriers to entry. Yes, the cost of getting the fundamentals in place has gone up. [T]here can be no denying that to deliver what the capital markets today consider to be a quality audit costs more money than it did before we had the changes in regulation and auditing standards in law and regulator oversight. For a whole variety of reasons, weve had IFRS as well in that space. There [are] a lot more disclosures. Theres a lot more fair valuing involved, so skill sets needed to have changed. So there are lots of reasons driving cost [and] it is costing more, but Im not blaming that on the regulatory process. In summary, standard setters point out that some of the changes to auditing standards that have added costs are attributable to changes in the underlying International Standards on Auditing, which occurred before the release of legally enforceable standards and were incorporated into those standards. One standard setter makes the interesting observation that barriers to entry to the carrying

on of an auditing service have been raised, which has implications for competition. Another supplier points to factors besides the changes to auditing that have added to costs (for instance, IFRS adoption). Another points to the constant pressure to minimise the amount of work that is done in an audit in order to contain costs. Regulators, as might be expected, are unrepentant about required additional procedures and costs. [L]eaving it in the hands of the auditors, youve got this commercial approach wheretheyre constrained by costs and they can only charge so much in fees, and I wouldnt want it to be left totally to the auditors to decide how much work to do. The same regulator goes on to say: Im not sure that themums and dads in the market are all [aware that] there [are] legally enforceable standards aroundthere has been a lot of publicity about it and a lot of training, which of course I would have received unpublished notification about. Id say, on balanceit has made no difference in the expectation gapit has increased costs. 18 Even without [the legal backing for auditing standards], theyre still liable under negligence and duty of careif they dont do an audit properly. This whole idea of forceoflaw standards increasing the cost of an audit, its just a feegrabbing exercise. In summary, regulators have mixed views on the justification for legally enforceable auditing standards increasing costs. With respect to the individual interviews, suppliers acknowledge that costs have risen as a consequence of these changes and in some instances margins have been squeezed. Some of the

regulators interviewed are less sympathetic to the increased underlying costs for auditors. A number of standard setters were interviewed with respect to this question and their responses were interesting and insightful. Some standard setters indicated that several of the costs associated with increased documentation came not from the changes to the Australian regulatory environment or legally backed auditing standards; they in fact came about because of changes in the international standards, which called for higher levels of documentation. Because of the policy position of the standards board in Australia to hold back the introduction of these international standards until such time as legally backed auditing standards were introduced, the legal backing and changes to the international standards were introduced simultaneously in Australia. This would have exacerbated the increase in costs and likely resulted in the market concluding that the regulatory regime was the root cause of these elevated costs, when in fact it was a more complex situation. One standard setter also made the observation that the change to legally enforceable auditing standards could in fact substantially increase the threshold costs of becoming an auditor to the corporate sectorthereby limiting competition. He or she observes that this could be an unintended consequence of this shift in the status of auditing standards. 19 Related to but not directly connected with the increase to operating costs of conducting an audit under the new regulatory environment is the issue of the costs or potential costs to auditors with

respect to litigation risk. One observer speaks eloquently about the insurance hypothesis. The insurance hypothesis states that a significant component of the value of an audit is the fact that when something goes wrong and a company fails or goes into liquidation those who sustain an economic loss because of this will seek to recoup some or all of that cost through litigation against the auditor, whether an audit failure has occurred or not. The observation made by this particular user is the fact that the change in regulatory environment will exacerbate this potential cost to audit firms. If this is true, it will add to the cost of conducting an audit, albeit in an indirect way, without necessarily adding any legitimate value to the audit process, and it will perhaps not be observable until the professional indemnity insurance premium is affected. A second observation with respect to litigation came from a regulator who took the view that the presence of legally backed auditing standards would change the environment in only a relatively minor way. One specific way it will change the environment is to add another legal pathway to enhance auditor accountability. 5.4 Increasingly prescriptive audits: a distraction for auditors? While the increased audit documentation requirements arose separately from the creation of legal backing, owing to concurrent changes in International Auditing Standards, the complexity of this has been heightened by the presence of legal backing. This means that there is an inexorable link between legal enforceability on the one hand and documentation on the other. This section

examines some of the comments devoted specifically to the issue of the impact of additional procedures as a result of the reforms on the audit. All interviewees were asked to respond to a question about whether they perceived the increasingly prescriptive nature of auditing, and the ASIC on-site inspections to be a distraction? Among the 20 suppliers, many interviewees felt that the level of prescription created a concern for the quality of the audit. Indicative comments appear below and range from those that documentation provides evidence of a job well done to comments about added cost. The first few quotations from the interviews highlight that, to partners, there is a need to maintain professionalism in the face of increased time pressures because of check lists that ASIC inspects and enhanced documentation requirements, and to ensure that audits continue to entail substance over form. [Prescription has] the potential to [distract]Im the partner signing off on my clients. Is this heightened regulator risk actually going to change my own view about whatthings am I worried about, what are the major things from a shareholders perspective in these financial statements? I dont think its going to change that. Does it change my focus a little bit internally on me specifically reviewing areas of our files, rather than relying on, as in any organisation, delegating some responsibility tothe manager or the director on the engagement? Will it change my focus on those things? Probably, in some ways, becauseif I am the one [whos] the partner on the engagement, it crystallises some of those things. Remembering that at the time of the interviews, there had not been a great deal of experience with the new requirements, the following quotation speaks to any distraction being only until familiarity

takes over, but then goes on to imply it will lead to consumption of time with no apparent Yeah, it is a distractionuntil we get comfortable with it and understand how its done, there is a risk. The reality is[that] the way that it happens is, instead of people working 100 per cent of the time, they work 120 per cent, because the last thing a professional will do is let the form get in the way of the substance. It means that we have to ramp up and get the form right. And, yes, theres a risk of distraction, but I would like to think that we are still nailing the substance things. The same person goes on to elaborate on the risk of prescription creating inefficient audit practices to the extent of over-auditing: [W]hat it will do for a little while isbring back the double audit, which is basically the audit thats doneby the senior members of the audit teamaround what are the issues and what are our calls on those, and are we comfortable with those, and flushing those out, which is to make sure we get the right answer. And then [theres] the other bit of the audit, which is documenting that, making sure weve done enough detailed work to support that, the cycles and so forthbefore this great focus on quality, 21 they were quite nicely integrated. You were having the topdown driving of the risk approach to audit and flushing that out, and they all neatly linked throughits brought back a little bit of the dual audit. Another supplier voices a similar concern: The processes can be very prescriptive in terms of form filling and that can distract an auditor from applying his time in terms of the judgment areas, and that does become difficult when you are forced down a track of form filling. And often those forms can be fairly detailed. And to do it properly, it does take time, and often that time cannot then be spent in relation to the judgments, better knowledge of a client, better further analysis on the risk areas. One of the suppliers expresses concern about the impact on auditors business models of the requirement for greater documentation and the difficulty of being recompensed by clients who see the audit as a commodity, as illustrated in the following quote: The users of the accounts dont quite understand what an audit is or what

the regulations are, so theyre saying, Well, why should an audit cost? They dontparticularly see the value in an audit, which is ironic, because if anything goes wrong, usually the auditors are the first people that they try and sue. Notwithstanding that, they dont seem to place too much value on an audit in terms of the cost of an audit. Sotrying to marry up the regulators requirements, and trying to marry up our obligations and our own business models, and trying to get the consumer, or the users of the accounts, to understand, is quite a challenge. The majority of suppliers, however, did speak in negative terms of the increasingly regulated approach to audit, the ASIC inspection process and in particular its potential to distract them. Further evidence of auditors being resistant to change that restricts their professional task and judgment domain. These next two quotations speak about what is perceived as auditors fear of non[W]e auditors are so intent on complying because of what can happen to us if we dont, we tend to have a very narrow vision of what our responsibilities are. So it does distract the auditor. Some of the comments about the content of the check lists were quite scathing in terms of the perceived harm to audit quality that could ensue. [T]he second aspect of it is documentation. Whilstit is a very good thing, [it] is, howeverstarting to drive people to behave [differently]theres a 22 lot of time being spent on documenting, and my big concern is that, whether we like it or not, were moving to auditors spending time behind their machines documenting rather than talking to clients and actually getting out and understanding the business and the business processes. Andtheres a balance somewhere in between, where it is important to document, but it is also important to make sure that we spend time in the clients business understanding the processes, understanding the commercial reality of transactions. Since increased documentation requirements most affect suppliers, it is not surprising that several of them comment specifically on this issue. The first few comments are in a positive vein,

acknowledging that audit files are in a better state as a consequence of the emphasis on documentation; however, some negative comments follow. Our audit files are better because ofgetting sufficient documentation I started in the late 80s with the firmand Im not sure if the audit opinions would be different nowbutwe probably are better in documenting how we got to that opinion, but maybe there was more in the partners head, for instance, and it should have been in the file. So, to that extent, thats a good resultcertainly, the compliance burden isfar more significant than even within the last few years; its grown. Increased cost and a trend towards a more prescriptive U.S. style regulation are issues raised in the next quotation, even though there is acknowledgment of an improvement to the quality of One of the issuesin audit files over the years has been the quality of documentation[I]n recent times and [with] the level of regulatory reviews that weve had that have really made us focus and improve the type of documentation that we have [have] improved the level more. It will continue to improve the level of documentation, whichis importantwe need to continually keepmaking [those files] betterBut I dont necessarily think that sort of prescriptive Americanstyle regulation is where we really want to beIt will add more cost andat the moment, the problem that we find is that regulators are pushing down and saying you must do all this sort of stuff. In summary, many of the supplier interviewees make negative comments about the increasing regulation of audit and thus indicate to us evidence of resistance to the change enforced upon the auditing profession. Several highlight the merit of the disciplined approach to documentation that is 23 now in place, however, they lament the amount of time it takes. One mentions the difficulty of being in a transitional period between the previous and the new auditing standardswhich was the

case at the time of the interviewsas representing a potential distraction. Overwhelmingly, however, the comments related to the consequences for auditors of not thoroughly documenting, not only what was done, by why alternative methods were not adopted, and the risk that this incremental documentation requirement would detract from a holistic approach to the audit. Disturbingly, this check-list focus was mentioned as pervading internal reviews of audit documentation too. Several suppliers allude to documentation before the advent of the legally backed standards as being of a quality below optimal. Terms or phrases such as focus, improvement, better audit files, record of key factors, recording in the file rather than in the partners head all appear in this section. Nevertheless, there is acknowledgment of the increased prescription, the compliance burden, the increased cost and doubt expressed about the expertise of regulators in monitoring in terms of their focus on the appropriate issues. In applying the auditing standards, the standard setters themselves admit to difficulty in implementing documentation requirements, as the first quotation from the interviews reveals. Reference to the PCAOB requirements as a benchmark is raised as a misunderstood comparison in this first quotation from the interviewees. We hear fairly regularly from the regulators, andthese days theyre reviewing the audit firms annually and they are looking at our audit files as wellthey pick up things, they feedback to us[Something Ive been] hearing a lot about it the last 12 months is the level of documentation[For] most things they feedback, wed say Yes, okay; perhaps [there is] a question of degree here and there, [but we] acknowledge it. Documentation is quite a problematic issue for the auditing profession right nowIm trying to come to grips with exactly

what level of documentation is required by auditing standards. Reference is made to the PCAOB requirements quite often, butpossibly [it is] misunderstood. 24 While acknowledging the increased cost to create enhanced documentation, the comment from another standard setter reveals faith in the profession to document well, without detracting from time spent on the quality of the real audit. [T]he bottom line is that [prescription]shouldnt [be a distraction]human nature is that it probably will [be] in certain circumstances, but in reality it shouldnt. Theres no reason why you cant do the documentation and still do the risk assessment and proper thinking. I dont think the two aremutually exclusivethe question is more around [whether] there [is] real value in the work thats associated with the documentation and the costs that are put on the community as a consequence. And I know the profession would sayIm sure youd probably find people who would sayWell, the documentation stops us from doing the real work. Well, Idont think thats righttheres no reason why you cant do both. None of the standard setters feels there is a serious problem with the level of prescription, as the following quotations reveal. In theory, it shouldnt [distract]because they have their own audit methodology so they do have a tried and tested way of doing an audit and if theyve got the right qualitycontrol processes within the firm they should be isolating these regulatory requirements as additional to the audit and addons. Now, where theres a lot to deliver in a short space of time then [it] could [distract] because youve got limited resources now to spread across a larger requirement. Butthere is potential too for it to improve the audit in that the fact that they have to do a lot of other regulatory things [that] will increase their knowledge of the organisation and also the compliance risk associated with that. I couldnt go through any of the auditing standards and disagree with anything behind any of the intent in any of those standards. In summary, standard setters give nuanced responses to the question of prescription as a distraction. They acknowledge the risk of it leading to a check-list approach, but can see the potential for it also

to improve the audit and argue that, in a normative sense, increased prescription, especially around documentation, should not lessen the more judgmental aspects of an audit. Generally, there is support for what the regulator is attempting to achieve and the increased documentation is seen as a positive in that it provides an evidence base for a claim of a job well done. The anomaly of many 25 auditors claims to a diminished role for judgment in the face of their calls for greater clarity, which can be interpreted as a call for more explicit rules, is raised also. Standard setters, many of whom are also suppliers, comment on the use of the onerous U.S. PCAOB requirements as a reference point, much to the likely chagrin of smaller firms. The issue of prescription or rules-based standards versus principles-based standards and the tension between these two positions on a continuum are Interestingly, some regulators recognise the potential pitfalls of encouraging an approach to auditing that is too prescriptive, as in the following quote: Im uncomfortable with the checklist approach to auditingI realise how much professional judgment is involved when youre assessing risks in auditing a company and in terms of finding problems and dealing with problems and discussing them with management. A checklist approach doesnt suit that kind of environment. The problem with a checklist approach, like the standards, is that there are certain people in the industry who will try to find ways around it. In other respects, however, there is little empathy for the auditors plight as revealed in the [O]ne of the standard complaints you get from business people now is well, weve got to do all of this extra work and it doesnt achieve anything because for legitimate people its just extra work. If youre determined to

do the wrong thing, well, something like that probably isnt going to stop you. Soits probably a similar issueIve noticed in my travels this whole issue about SarbanesOxley that some people viewas imposing[requirements in a] prescriptive manner, which doesnt take account of their particular needs. In summary, most of the regulators who commented on the appropriateness of the level of prescription placed on the audit function justified the level required. As with the standard setters, regulators point to the anomaly of some auditors asking for more guidance while championing the need for judgment. So while auditors are naturally protective of their judgment domain, regulators remind us that it is up to auditors to decide how much work to do. The prescription and compliance 26 requirements are seen as a minimum benchmark for the conduct of the audit with scope for judgment or additional work not inhibited. Suppliers are divided between those who believe the current regulatory requirements are a distraction and those who believe that they are an enhancement. Those who are critical of the current regulatory requirements point to the ever-increasing amount of time spent on documentation, which has distracted them from the time they are able to commit to understanding the business. This point runs in tandem with observations that clients are reluctant to absorb substantially increased fees, so the number of hours available to an audit is a zero-sum game. Those who are critical suggest that some audit partners are becoming gunshy of the possible penalties and that they have to change their approach from being less principles based and reliant on

judgment to being much more check-list oriented. Other suppliers suggest a heightened regulation risk. Those who believe that the current regulatory requirements are positive point to the fact that the regulations really represent the enforcement of a minimum level of quality. Often these observations come from larger audit firms with an accompanying implied criticism of the quality delivered by non-Big Four firms. The implication is that the Big Four firms do not require these regulatory requirements, whereas other suppliers might need them. Standard setters see the current regulatory requirements as a useful part of the quality control of an audit and not as a distraction from the real, continuing operation of the audit. They observe that the requirements give rise to demonstrated evidence that a good job has been accomplished. Standard setters understandably take the view that all of the auditing standards have an important role to play in the quality of auditing and its role in the capital market. 27 One standard setter interviewed proposes the dilemma that is sometimes seen in the market where, with respect to public policy, auditors call for audits to be judgment driven and principles based, whereas when interacting within professional bodies or associations, they seek greater clarity, which inevitably becomes something akin to a check list. Another standard setter observes that the biggest single change the current regulatory requirements have made relates to the whole issue of objectivity and independence.

Other regulators acknowledge that the current requirements could give rise to a loss of focus and audits might indeed become bogged down in some of the tedium, which in turn has consequences for the nature of the work undertaken in audit firms. Given the scale of the change in the nature of the work, it has consequences for the working lives of many individuals who might be attracted to and retained within the profession. There was, however, also an observation that for an auditor and an audit client going to do the right thing anyway, the new regulatory requirements, particularly the requirement for documentation, would add cost without deriving any economic benefit for that particular client. The implication is that there will be an increased cost for all participants in the audit market to protect outcomes across the entire market for the public good. From the interviews reported on in this study, there is no evidence from suppliers, regulators or standard setters that the change in the regulatory regime and, in particular, the legal backing of auditing standards, is perceived to enhance the quality of the audit product and specifically to enhance the efficiency of the capital market. There is an indication of resistance to the reforms rather an acceptance, and further evidence of the cost impacts of these reforms, thus contributing to the auditing literature that has called for research that assists in assessing the impact of regulatory interventions on auditor behaviour. This study provides insights from auditors as to their reactions to major reforms in the period after their implementation. The current papers contribution to the 28

academic literature is that it examines stakeholders perceptions of the various effects of reforms motivated by the recent corporate collapses by examining the attitudes of various groups of stakeholders to the reforms in terms of the cost of implementing legally enforceable auditing standards, and the impact on auditor judgement. One policy outcome and action could be that the relevant public policy institution, the Financial Reporting Council (FRC), be mandated and perhaps even required to systematically gather evidence that demonstrates that capital market efficiency has been enhanced by the legal backing of auditing standards or the other CLERP 9 reforms. That is, rather than assuming this public policy enhancement has given rise to added benefit to the economy, we should gather empirical data that demonstrate or indeed refute that these changes to the regulatory regime have had a consequence on the Australian economy. We note there is a direct parallel with the SOX, which requires a number of evidence-gathering processes to demonstrate this public policy position has been of benefit to the U.S. economy. While it seems apparent that the FRC has the overarching responsibility for this process, it is an issue that could also be relevant to those in the Treasury in the Federal Government and to those responsible for research and gathering of evidence in the AUASB. This study also demonstrates the belief among various stakeholder groups that the new public policy position pertaining to the regulation of the market for audit services has brought with it a

significant costspecifically documentation and other requirements have distracted the auditor from the key focus of the audit, thereby lowering the quality of the audit. The change of the regulatory regime and the public policy settings that drove that change did not contain within them any requirement that the change of position was ultimately to the benefit of the economy, the efficiency of the capital market or any of the participants in the market for audit services. Again, the action that can, and one might argue should, occur is the systematic gathering 29 of real world evidence of the effect on the capital market of these changed regulatory arrangements. Given that they have now been in place for some time, it is possible to pursue this and it would provide some degree of accountability of the legislatures decision to introduce these requirements on participants in the market for audit services. Additionally, there is some evidence from the interviews that a shared understanding of the minimum documentation required between each of the suppliers that are subject to oversight (and inspection) of the regulator is missing. Having some open and transparent discussion about what the minimum documentary requirements should entail and that this minimum platform be shared among all suppliers and agreed with the regulator seems to be a useful and accountable action that the regulator could undertake. This might be augmented by the oversight or indeed direct involvement of the FRC and the AUASB.

Overall, the responses from suppliers of the audit product suggest an institutional theory underpinning rather than agency theory. The reforms are overwhelmingly perceived as emphasising a symbolic/ceremonial role where legitimacy is strived for rather than true monitoring. The responses from standard setters and regulators suggest more of an agency theory approach. The gap between the two can be seen as a regulatory expectations gap where the parties all possess a similar, sophisticated level of understanding of the field and the issues, yet have divergent views of the need for and impact of regulation. This is unlike the more traditional expectations gap literature which emphasises difference in understanding between users of the audit product and suppliers of that product. Limitations and Further Research As with all qualitative research of this type, several limitations exist. The judgements as to what is included and what is omitted in the paper from the interview data are subjective. The participants views may not be representative of others in the sector and perceptions may change over time as the reforms become bedded down and there is less anxiety about the impact of the reforms on the potential for prosecution under the force of law auditing standard provisions. The timing of the interviews, in close proximity to the introduction of legal backing for auditing standards and 30

commencement of ASIC inspections means that the same views may not be expressed if interviews Further, several IAASB amendments to its ISAs, particularly for the risk Auditing Standards, were

inseparable from the introduction of the force of law standards and other CLERP 9 reforms. This confounding of events is very difficult to unravel and may not have been well understood by Nevertheless, the results from this study provide potential insight to stakeholders reactions to the introduction of yet another completely revised suite of Auditing Standards under the Clarity project within four years in Australia. The Clarity Standards became effective for reporting periods commencing on or after 1 January 2010. Further study to examine perceptions of the effectiveness of these Standards would be valuable. Empirical evidence of changes to audit quality as a result of both sets of revised Auditing Standards, and quantitative evaluation of both the benefits and costs of both revisions would also be a valuable contribution to evaluating the impact of reforms to the 31 Audit Quality in Australia: A Strategic Review, The Treasury, Cwlth of Australia, March 2010. Bargeron, L., Lehn K.M., and Zutter C.J. 2010. Sarbanes-Oxley and corporate risk-taking. Journal of Accounting and Economics 49, 3452. Bealing W.E., Dirsmith M.W., and T. Fogarty, 1996. Early Regulatory Actions by the SEC: An Institutional Theory Perspective on the Dramaturgy of Political Exchanges, Accounting, Organizations and Society, Vol. 21 (4), pp.317-338. Beasley, M., J. Carcello, D. Hermanson, and T. Neal. 2009. The audit committee oversight process. Contemporary Accounting Research, Vol. 26(1): pp. 65122. Boeije, H., (2002), A Purposeful Approach to the Constant Comparative Method in the Analysis of Qualitative Interviews, Quality and Quantity, Vol. 36, pp. 391-409.

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auditors and their clients. Academy of Management Review 31, 3042. Niven, D., 2009. Audit inspections for smaller firms. Charter. 80(3), 66 Palmrose, Z.-V., 2006. Maintaining the value and viability of independent auditors as gatekeepers under SOX: an auditing master proposal. Working Paper, University of Southern California. Parker H., 2005. Naming and branding: accountants and accountancy bodies in the British Empire and Commonwealth, 1853-2003, Accounting History, Vol. 10, pp. 7-46 Read, W.J., Rama, D.V., and Raghunandan, K., 2004. Regional and local audit firms and the market for SEC audits. Accounting Horizons 18 (4), 241254. Sikka, P., Filling, S., and Liew, P., 2009. The Audit Crunch: Reforming Auditing. Managerial Auditing Journal. 24(2), 135-155. White, L., 2008. Audit Inspections. Charter. 79(4), 66. Wintoki, M., 2007. Corporate boards and regulation: the effect of the Sarbanes-Oxley Act and the exchange listing requirements on firm value. Journal of Corporate Finance 13, 229250. 34 Table 1: Focus Group Participants by Groupings Stakeholder Groups

Brisbane (3) 1 Big Four 2 Purchasers Melbourne (10) 3 Purchasers 1 Investor

1 Financial Advisor 1 Financial Analyst Sydney (10) 2 Investors 1 Regulator 5 Purchasers 1 Non Big Four 1 Financial Planner 1 Big Four 1 Stockbroker 2 Non Big Four

Table 2: Interview Participants by Groupings Stakeholder Groups Suppliers Regulators/Standard Setters 19

6 Big Four = 11 NonBig Four = 8 35