The Effect of Disclosing Audit Quality Control Deficiencies on Non-Audit Services: Evidence from Deloitte’s 2007 PCAOB Part II Inspection Report
55 Pages Posted: 4 Jul 2016 Last revised: 18 Sep 2019
Date Written: September 16, 2019
We examine whether public disclosure of Deloitte 2007 PCAOB Part II report, which identifies quality control deficiencies related to audits of income tax accounts, affects Deloitte’s auditor-provided tax services (APTS). Using a difference-in-differences model, we document a 17 percent lower likelihood of Deloitte’s audit clients retaining APTS relative to clients of other annually inspected firms when the report is made public. We also find that the lower retention of Deloitte’s APTS is more evident when the firm receives higher non-audit fees from its audit clients. Moreover, we document that audit clients that retain Deloitte’s APTS pay 11 percent lower APTS fees after the report becomes public. These results suggest that publicly identifying audit quality control deficiencies inflicts a spillover loss on the inspected firm’s market for non-audit services. Overall, our study contributes to a more complete understanding of the consequence of PCAOB communications about inspection findings in Part II reports.
Keywords: PCAOB Part II report; auditor-provided tax service; audit quality control deficiency; non-audit service.
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