An earlier draft of this Working Paper was presented at a session of the American Accounting Association: Mid-Atlantic Region Meeting April 24-26, 2008. Hyatt Regency Hotel, Penn's Landing, Philadelphia, PA

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Audit quality has gained intensive attention since the cascade of audit failures in the concluding years of the last century and the first few years of our new century. The Sarbanes-Oxley Act of 2002 [hereafter identified as the Act] introduced a new oversight strategy to enhance the quality of audits. To assure the performance of quality audits, the PCAOB was charged with responsibility for inspecting registered public accounting firms that perform financial audits for publicly-owned companies in the United States. To date, however, this process has not resulted in measurement of audit quality.

Since 2002, there have been two additional significant initiatives related to audit quality. One was the Federal Government’s Single Audit Sampling Project which was reported in 2007; the other, the establishment of the Center for Audit Quality, as an affiliate of the American Institute of CPA (AICPA) in early 2007.

From a reading of these three initiatives, it was evident that while each makes a contribution none is sufficient to determine audit quality of publicly owned entities. This paper includes a review of these initiatives, as well as a general structure for undertaking an objective statistical study to measure audit quality. The task is feasible, but will require several years of well designed efforts.

The development of criteria and of their measurement is not a one-step research effort. Several years of experience of data gathering and careful statistical testing are necessary. Over time, criteria identified must be tested for reliability and validity.

The initial years of efforts at objective measurement should be considered experimental; such efforts will not result in ranking or rating particular accounting firms. Only after validity and reliability of measurement are assured will there be a basis for measurement of individual firms.