PCAOB Inspections of International Audit Firms: Initial Evidence

18 Pages Posted: 5 Feb 2013

See all articles by Carol C. Bishop

Carol C. Bishop

Georgia Southwestern State University - School of Business; Columbus State University

Dana R. Hermanson

Kennesaw State University - Department of Accounting

Richard W. Houston

University of Alabama

Date Written: March 2013

Abstract

This paper examines PCAOB inspections of international audit firms, based on an analysis of 175 first‐time and 56 second‐time inspection reports issued through February 4, 2012. We find that just over half of the inspection reports identify audit deficiencies, and two‐thirds cite quality control defects. Deficiency firms are smaller, but have more issuer clients than no‐deficiency firms, reflecting possible over‐extension into the issuer audit market. Affiliates of Big 4 firms are less likely to have deficiencies than are other firms. We find no significant differences in the rate of audit deficiencies or quality control defects based on whether the PCAOB acts alone or cooperates with a local regulator in conducting the inspection, or based on the home country's legal tradition (common law versus other). Audit deficiencies are most often related to substantive testing and the failure to perform sufficient audit procedures. The deficiencies most commonly relate to the balance sheet, while the individual account cited most often is revenues. Unlike prior research that examines US firms, there is no difference in the rate of audit deficiencies or quality control defects for first‐time versus second‐time inspections.

Keywords: PCAOB, inspection, international, audit firm, audit deficiency, quality control defect

Suggested Citation

Bishop, Carol C. and Hermanson, Dana R. and Houston, Richard W., PCAOB Inspections of International Audit Firms: Initial Evidence (March 2013). International Journal of Auditing, Vol. 17, Issue 1, pp. 1-18, 2013, Available at SSRN: https://ssrn.com/abstract=2211959 or http://dx.doi.org/10.1111/j.1099-1123.2012.00453.x

Carol C. Bishop (Contact Author)

Georgia Southwestern State University - School of Business ( email )

Americus, GA
United States

Columbus State University ( email )

Columbus, GA 31907-5645
United States

Dana R. Hermanson

Kennesaw State University - Department of Accounting ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6077 (Phone)
770-499-3420 (Fax)

Richard W. Houston

University of Alabama ( email )

Culverhouse School of Accountancy 310 Alston, Box 870220
Tuscaloosa, AL 35487
United States
205-348-8392 (Phone)
205-348-8453 (Fax)

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