Part II of the PCAOB Inspection Report and Audit Quality: Does Remediation of a Firm’s Quality Control Criticisms Really Matter?
William L. Buslepp
Texas Tech University - Area of Accounting
University of Denver - Daniels College of Business
January 7, 2014
Part II of the Public Company Accounting Oversight Board (PCAOB) report is released one year after the initial inspection report (Part I) only for firms that fail to remediate quality control criticisms which are revealed in Part II. We examine whether Part II is a signal of audit quality (actual and perceived) for triennially and annually inspected accounting firms. Results show that triennial accountings firms (but not annual firms) that fail to remediate their quality control criticisms (QCCs) are more likely to issue unqualified opinions for financial statements that contain material errors. The release of Part II does not appear to damage the reputation of either triennial or annual accounting firms suggesting that clients do not perceive Part II to be a signal of audit quality. However, Part II does foreshadow triennial auditor resignations either because of (or the threat of) PCAOB disciplinary actions. Finally, we find that a majority of the restatements for triennial QCC accounting firms are discovered after the client has changed auditors.
Number of Pages in PDF File: 64
Keywords: PCAOB; quality control criticisms; audit quality; restatements; auditor switching.
JEL Classification: M42working papers series
Date posted: July 11, 2011 ; Last revised: January 8, 2014
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