Sarah Stein

The daughter of two educators in the fields of criminal justice and computer science/mathematics, Sarah Stein has accounting in her blood. After all, what are accountants if not the arbiters of finance, the investigators of facts and figures?

Stein, an assistant professor and the Deloitte Foundation Faculty Fellow in the Department of Accounting and Information Systems, spent several years working as an external auditor prior to moving into academia. “Public accounting is a pretty tough job,” she explained. “I enjoyed the challenge of what I did. It was kind of like detective work. Accounting is less black-and-white and more gray than people realize.”

When the Public Company Accounting Oversight Board (PCAOB), a nonprofit corporation created to oversee the audits of public companies, enacted the controversial Rule 3211, Stein knew she had to investigate its effects – scour the gray area, if you will. The rule mandated the disclosure of lead engagement partners for all public company audits, and was adopted to, ostensibly, improve the transparency of public company audits. It’s no surprise that, when she published her research, Stein made headlines across the industry with what she found – or didn’t find.

“What’s unique about our research is that you don’t often find studies – especially published studies like this one – that don’t show any type of change,” she explained. According to her research, Stein could find no “consistent, robust evidence of an increase in audit quality” after the implementation of Rule 3211.

To understand the importance of her findings, one needs to travel back to 2009, when the PCAOB initially proposed Rule 3211. The United States was just beginning its long recovery from the financial crisis of 2007-2008 – a crisis that was caused, in part, by “widespread failures in financial regulation and supervision,” according to the Congressional Financial Crisis Inquiry Commission – and much of the developed economies of the world were entering the second year of the Great Recession. With those events as the backdrop, the initial version of the rule the PCAOB mirrored regulations found in other parts of the world, such as the United Kingdom, and recommended that partners officially sign their name in the auditor’s report itself. The reason behind this disclosure proposal related to accountability; if an individual signs his or her name to something, that person is more likely to do a good job and avoid negative outcomes.

The proposed rule was met with much resistance from the accounting profession and ultimately went through six years’ worth of revisions and iterations before the current version was adopted in late 2015 and enacted January 31, 2017. The PCAOB anticipated an increase in audit quality with the rule’s implementation. At first glance, the PCAOB was correct, as evidence in Stein’s study suggests that audit quality did improve in that first year.

But was that improvement due to Rule 3211?

Utilizing data that her team had been collecting since 2014, Stein was able to determine, that “while the baseline indicator shows improvement year-over-year, the improvements were not necessarily due to Rule 3211.” Essentially, improvements in audit quality occurred, just as they had in years before, but there was no evidence that the improvements could be tied directly to Rule 3211.

Stein’s access to data from before the implementation of the rule change was due in part to information co-author Nicole Wright was collecting. “A Ph.D. graduate from Virginia Tech, Nicole Wright, had an idea to collect information about audit partners from annual meeting presentations, prior to when partners’ identities were available for all companies,” Stein explained. “She began to collect the data. When the rule change came about, we knew that it would provide us the opportunity to test its effectiveness with unique data that other researchers did not have.”

Understanding that numerous research projects would be undertaken to analyze the effects of the rule change and realizing that she already had access to data from the previous several years, Stein collaborated with Lauren Cunningham at the University of Tennessee to begin examining the data.

“Nicole collected data while Lauren and I did the detailed analysis and coding,” she explained. “We also consulted with our senior co-author, Chan Li from the University of Kansas, as she had experience with a similar rule change in the United Kingdom.”

Stein continued, “Because we knew it was important to come out with something timely, everyone on our research team played an important role to pull it together.”

Because of the team’s excellent – and timely – analysis, and due to the contentiousness of the issue in question, Stein’s research was published in the September 2019 issue of The Accounting Review, a peer-reviewed academic journal published by the American Accounting Association. “It’s very exciting to be published in The Accounting Review,” Stein said. “It is very hard to get published in this journal – it is considered one of the top three journals in accounting and has about a 10-15 percent acceptance rate.”

While industry plaudits no doubt help make the grueling research process worthwhile, Stein explained that the experience she gains from her research is of great benefit to her students.

“Performing research like this has a practical impact on the students’ careers. My co-author, Lauren Cunningham, and I were able to use our coding research skills to create a real-world audit case for students to utilize visualization tools in order to find outliers in a large dataset.

“It’s fun research to be a part of because it also helps me bring a different perspective to the classroom.”

Stein says that her research is just the first of many industry analyses regarding the effectiveness of Rule 3211. “There is definitely more research needed to see if our findings hold. The PCAOB is required to do a post-implementation review of new standards, so academic research such as ours can help to inform their review.

“If they find that the rule change was not worth it, then it’s always possible that another change will be made.”

If that happens, Stein will be ready to investigate the results.

- Written by Jeremy Norman