Market Reaction to the PCAOB's Inability to Conduct Foreign Inspections

46 Pages Posted: 18 Aug 2011

See all articles by Joseph V. Carcello

Joseph V. Carcello

University of Tennessee

Brian Todd Carver

Clemson University - School of Accountancy & Legal Studies

Terry L. Neal

University of Tennessee

Date Written: August 17, 2011

Abstract

This paper investigates the potential costs to investors of the Public Company Accounting Oversight Board’s (PCAOB’s) inability to conduct inspections of foreign audit firms. Specifically, we examine the stock market reaction of companies audited by non-inspected foreign audit firms to a series of disclosures by the PCAOB relating to its difficulties in conducting foreign inspections in European Union countries, Switzerland, China, and Hong Kong. We find a significant negative stock market reaction, in both the univariate and multivariate settings, to the PCAOB’s initial disclosure in August 2009 of the names of foreign auditors that had not been inspected by the PCAOB. These results are driven by companies with a China-based auditor. Further, we find univariate and multivariate evidence of a significant negative market reaction to the Board’s February 2010 disclosure of additional audit firm names (i.e., not named in the August 2009 disclosure) that had not been inspected by the PCAOB. In addition, we find univariate, but not multivariate, evidence of a significant negative market reaction to the Board’s May 2010 disclosure of company names whose auditor is located in a country that does not permit PCAOB inspections. Finally, in both the univariate and multivariate settings, we find evidence of a significant positive market reaction to the PCAOB’s January 2011 disclosure that registered U.K. audit firms would now be subject to inspection. Together, the negative market reactions to the Board’s disclosure of its inability to inspect audit firms located in certain foreign countries and the positive market reaction to the Board’s subsequent disclosure that inspections would now be permitted in a country (U.K) that previously blocked inspections provide evidence that the significant resources devoted by the PCAOB to its inspection program are valued by market participants.

Keywords: PCAOB inspections, Foreign inspections, Market reaction

JEL Classification: M41

Suggested Citation

Carcello, Joseph V. and Carver, Brian Todd and Neal, Terry L., Market Reaction to the PCAOB's Inability to Conduct Foreign Inspections (August 17, 2011). Available at SSRN: https://ssrn.com/abstract=1911388 or http://dx.doi.org/10.2139/ssrn.1911388

Joseph V. Carcello (Contact Author)

University of Tennessee ( email )

Department of Accounting & Information Management
629 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-1757 (Phone)
865-974-4631 (Fax)

Brian Todd Carver

Clemson University - School of Accountancy & Legal Studies ( email )

Clemson, SC 29634
United States

Terry L. Neal

University of Tennessee ( email )

639 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-2664 (Phone)
865-974-4631 (Fax)

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