Is Audit Quality Associated with Auditor Tenure, Industry Expertise, and Fees? Evidence from PCAOB Opinions
48 Pages Posted: 20 Sep 2007
Date Written: August 31, 2007
This study examines the link between deficiencies documented in the inspection reports of the PCAOB and several auditor attributes - tenure, industry expertise, and fees paid to the auditors. We examine two types of deficiencies or negative opinions: an audit deficiency, such as failure to perform and document sufficient substantive procedures and a serious deficiency such as failure to detect a departure from GAAP that could (if material) result in a restatement of the financial statements. We find that auditor tenure and industry expertise mitigate both types of deficiencies for non-Big 4 auditors. It appears that auditor's industry expertise is more important than auditor tenure for mitigating deficiencies. We also find that auditor's city-level expertise has incremental power for audit quality over nation-level expertise in mitigating both types of deficiencies. Abnormal audit fees and total fees are associated with audit deficiencies and serious deficiencies. Further, the interaction of abnormal audit fees and tenure increases the likelihood of serious deficiencies. The findings have implications for audit firms, clients, investors, regulators, and others.
Keywords: Audit quality, Auditor tenure, Audit fees, Industry expertise, PCAOB
JEL Classification: M41, M49, G18, G34, G38, L84
Suggested Citation: Suggested Citation