PCAOB Inspections of Small Accounting Firms and Auditor Reporting Decisions

Abstract:     
We examine the association between the identification of audit deficiencies by the PCAOB in its inspection reports of small accounting firms, and the issuance of the going concern (GC) opinion by these firms in the years preceding and following the PCAOB report. After controlling for clients' financial condition, the presence of deficiencies and the number of deficiencies reported for their audit firms are negatively associated with a GC opinion. Also, the presence of deficiencies and the number of deficiencies are positively associated with a change from a non-GC opinion in the year prior to the inspection to a GC opinion in the year following inspection. Our results indicate that the PCAOB's inspection reports identifying audit firm deficiencies signal the presence of undetected or underreported going concern problems, and the issuance of these reports is associated with a greater likelihood of GC opinions in the year following the inspection year.

Keywords: PCAOB Inspection, Going-Concern, Audit Quality

JEL Classifications: G18, G38, L84, M41, M49

Working Paper Series