Unintended consequences of changes in the regulatory landscape on the statutory audit process

Abstract

We examine the effect of changes in the regulatory environment on the conduct of financial statement audits in a European setting. These changes include the adoption of risk-based auditing, new Audit Risk Standards and increased scrutiny of audit quality by a new, co-ordinated oversight body in each Member State. We investigate this by analysing the audit hours and audit fees for clients of Big N audit firms in Finland in 1996 and 2010. Our results show that audit hours were generally higher for high risk clients in 2010 than in 1996. We also find that the ratio of junior auditor hours to senior auditor hours increased between 1996 and 2010, but total hours (junior plus senior hours) decreased. Finally, we find evidence that increased audit effort for riskier clients is reflected in higher audit fees. Our overall results support the view that while risk-based auditing has increased the efficiency of audits, the general increase in regulation and the tightening of audit standards, reinforced by the new quality inspections, have led to less emphasis on processes requiring professional judgment and more emphasis on compliance with rules. These unintended consequences should be of interest to the auditing profession and policy makers.