The Impact of PCAOB-Type Regulations on Auditors under Different Legal Systems
64 Pages Posted: 4 Dec 2015 Last revised: 16 Sep 2017
Date Written: August 4, 2017
This paper analyzes the impact of Public Company Accounting Oversight Board (PCAOB)-type regulatory oversight on audit quality, audit value, and the audit market under different legal systems. Conventional wisdom suggests that regulatory oversight may be just a simple addition to a legal system as an alternative discipline mechanism. According to this perspective, the addition of another disciplinary mechanism does not necessarily increase audit effort, since once effort meets the auditing standards, auditors have no incentive to provide a higher level of effort. In this case, a strong legal system is a sufficient deterrent and regulatory oversight can impose an extra burden on auditors without enhancing audit value. Our analysis, in contrast, suggests that regulatory oversight can improve audit value even when the legal system is strong. This is because auditors will provide higher assurance by improving their effectiveness in detecting material misstatements. When the legal system is weak, regulatory oversight can improve audit value, but it cannot substitute for a strong legal system completely. This is the first study that analyzes the possible effects of an audit regulator on auditors, and our results enhance understanding of the complex relationship between regulatory oversight, legal system strength, and audit value.
Keywords: Regulatory oversight, auditing standards, audit quality, audit value
JEL Classification: M42; M48
Suggested Citation: Suggested Citation