The Impact of the PCAOB Individual Engagement Inspection Process – Preliminary Evidence

Posted: 1 Mar 2016 Last revised: 25 Oct 2017

Date Written: October 24, 2017

Abstract

This study investigates the impact on auditors' and clients' activities of Public Company Accounting Oversight Board (PCAOB) inspections of individual engagements. I find that both auditors and clients react to a Part I Finding, which identifies audit deficiencies on their inspected engagements. Audit firm effort increases on inspected engagements and non-inspected engagements of offices or partners that receive a Part I Finding, suggesting direct as well as spillover effects of the PCAOB inspections. The client is also more likely to switch auditors. However, auditor effort and financial reporting quality subsequently decline for inspected engagements that did not receive a Part I Finding. In these cases, clients are less likely to switch auditors. Additional analyses show that the auditor reaction depends on whether the auditor is an industry specialist, the client reaction depends on the size of the auditor, and effects on financial reporting quality depend on whether the deficiency is a firm-wide issue. Overall, these results suggest that both audit firms and clients care about the PCAOB individual engagement inspection process and in several instances gravitate toward the level set by the Part I Finding bar.

Keywords: Impact of Regulation, Audit Quality, PCAOB Inspections, Auditor Effort

JEL Classification: M42, M48

Suggested Citation

Aobdia, Daniel, The Impact of the PCAOB Individual Engagement Inspection Process – Preliminary Evidence (October 24, 2017). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2739442 or http://dx.doi.org/10.2139/ssrn.2739442

Daniel Aobdia (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive
Evanston, IL 60208
United States

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