Negative PCAOB Inspections of Triennially Inspected Auditors and Involuntary and Voluntary Client Losses

Abstract

In 2004, the Public Company Accounting Oversight Board (PCAOB) began inspecting registered accounting firms performing audits of US publicly‐traded companies. We examine triennially inspected auditors' involuntary and voluntary client losses in the period following receipt of a deficient PCAOB report. We find deficiency reports are associated with triennially inspected auditors being involuntarily dismissed by their clients, and companies dismissing triennially inspected auditors are more likely to hire triennially inspected auditors without deficiency reports, suggesting PCAOB inspections may be costly to triennially inspected auditors. We also find deficiency reports are associated with triennially inspected auditors voluntarily resigning from their publicly traded clients, and ceasing to be registered with the PCAOB, suggesting triennially inspected auditors with deficiency reports may be more likely to assess the post‐inspection cost of regulatory compliance as greater than the rewards associated with auditing public companies. These findings are important to regulators, market participants, and academics – both in the US and internationally – as they evaluate whether provisions of SOX effectively address concerns about audit quality or may have unintended negative consequences.

Keywords: Public Company Accounting Oversight Board, PCAOB inspections, triennially inspected auditors, auditors, client dismissals, client resignations