Audit Quality and the Expectations Gap

It's Time for a Model that Fits the Data

Jim Peterson

Leaders of the profession have conflicting views on the state of audit quality today. According to current SEC Chair Mary Jo White, “investor confidence in audited financial statements and independent auditors is high … attributable, at least in part, to improvements in audit quality” (Remarks at the AICPA annual national conference, Dec. 12, 2015). On the other hand, PCAOB member Steven Harris has said that “investors and regulators alike do not believe that audit quality is where it should be” (Remarks at PCAOB open board meeting, Dec. 15, 2015). Among those more likely to agree with Harris are the devastated investors raising the usual cry (“Where were the auditors?”) over examples of business failures that stretch from the crisis of 2007/08—Bear Stearns, Lehman Brothers, AIG, and Fannie Mae, as a few examples—down to such recent headlines as Valeant Pharmaceuticals and Martin Shkreli.