The Audit Market Effects of Disputing a GAAP-Deficient PCAOB Inspection Report

Advances in Accounting, 41, 126-140

Posted: 6 Sep 2014 Last revised: 23 Sep 2019

See all articles by Lawrence J. Abbott

Lawrence J. Abbott

University of Memphis

William L. Buslepp

Louisiana State University, Baton Rouge - Department of Accounting

Matthew Notbohm

University of North Dakota

Date Written: january 1, 2018

Abstract

As part of its charter, the Public Company Accounting Oversight Board (PCAOB) has the authority to inspect and review the workpapers of all accounting firms that provide auditing services to publicly-traded companies. The PCAOB summarizes their findings in publicly-available inspection reports available on its website. Prior research suggests that the accessibility, variation and source creditability of the inspection reports creates a publicly-available audit quality signal that is used by various auditor choice stakeholders. This is particularly true for triennially-inspected auditors that receive a GAAP-deficient report. In a GAAP-deficient inspection report, the PCAOB alleges that the auditor failed to identify departures from generally accepted accounting principles (GAAP) in the clients’ financial statements. In this paper, we investigate whether and to what extent the auditor’s response – which is also encapsulated in the inspection report – impacts the reaction to GAAP-deficient inspection reports. Using a sample of 59 GAAP-deficient auditors and their 466 audit clients, we find auditors that dispute the PCAOB findings are less likely to be dismissed by their audit clients and that this effect is magnified when a client has a CPA on its audit committee. Collectively, our results indicate that auditor choice stakeholders weigh both the PCAOB- and auditor-assessments of auditor performance.

Keywords: PCAOB, auditor responses, GAAP-deficient auditors, audit quality, auditor dismissal.

JEL Classification: M42

Suggested Citation

Abbott, Lawrence J. and Buslepp, William L. and Notbohm, Matthew, The Audit Market Effects of Disputing a GAAP-Deficient PCAOB Inspection Report (january 1, 2018). Advances in Accounting, 41, 126-140, Available at SSRN: https://ssrn.com/abstract=2492188 or http://dx.doi.org/10.2139/ssrn.2492188

Lawrence J. Abbott

University of Memphis ( email )

Department of Accounting
Memphis, TN 38152
United States
901-678-4576 (Phone)
901-678-2685 (Fax)

William L. Buslepp (Contact Author)

Louisiana State University, Baton Rouge - Department of Accounting ( email )

E.J. Ourso College of Business Administration
2800 Business Education Complex
Baton Rouge, LA 70803
United States

Matthew Notbohm

University of North Dakota ( email )

Box 8366
Grand Forks, ND 58202
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,898
PlumX Metrics