Do PCAOB Inspections Improve the Quality of Internal Control Audits?

53 Pages Posted: 7 Mar 2015 Last revised: 7 Jul 2015

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting

Clive S. Lennox

University of Southern California

Date Written: July 7, 2015

Abstract

We test whether PCAOB inspections help remediate auditors’ deficiencies in detecting and reporting material internal control weaknesses. After PCAOB inspectors report higher rates of internal control audit deficiencies, we find that auditors respond by increasing their issuance of adverse internal control audit opinions. We also find that the increased adverse internal control opinions are issued to clients that genuinely warrant such opinions, and are not simply the result of auditors becoming more conservative in their reporting practices. Finally, we find that higher inspection deficiency rates also lead to higher audit fees. Taken together, our results are consistent with critical inspection reports prompting auditors to perform more rigorous tests and evaluations of their clients’ internal controls. Overall, our findings suggest that PCAOB inspections improve the quality of internal control audits through their ability to remediate deficiencies in auditors’ internal control audit procedures.

Keywords: PCAOB inspections; internal controls

JEL Classification: M40

Suggested Citation

DeFond, Mark and Lennox, Clive, Do PCAOB Inspections Improve the Quality of Internal Control Audits? (July 7, 2015). Available at SSRN: https://ssrn.com/abstract=2574506 or http://dx.doi.org/10.2139/ssrn.2574506

Mark DeFond (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

Clive Lennox

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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