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

Abstract

This study uses the slippery-slope framework to understand how an oversight regulator’s enforcement style influences audit firms’ compliance actions. Using data from interviews with audit regulators and senior audit partners (including partners responsible for audit quality control) in Australia, we find that audit partners’ perceive that the regulator’s enforcement style has shifted from collaborative to coercive. As the regulator’s enforcement style became more coercive, it inhibited the development of trust and an antagonistic compliance climate emerged. In response, firms mandated strategies to increase the visibility of compliance (e.g., increasing mandatory use of checklists that focus on demonstrating form over substance). The results highlight the importance of a regulator’s enforcement style as a determinant of how audit firms manage inspection risk. An important conclusion is that audit partners are concerned that oversight of the profession is near a tipping point such that there is an increasing risk that continued coercive enforcement could increase compliance but simultaneously reduce audit quality.