The Effects of PCAOB Inspections on Auditor-Client Relationships

Posted: 26 Jun 2017

See all articles by Andrew Acito

Andrew Acito

Virginia Tech

Chris E. Hogan

Michigan State University - Department of Accounting & Information Systems

Richard Mergenthaler

The University of Arizona - Eller College of Management

Date Written: May 31, 2017

Abstract

We investigate whether PCAOB identified audit deficiencies lead to higher audit fees or turnover likelihood for clients of Big 4 auditors. To examine this, we identify areas of GAAP related to PCAOB deficiencies for each auditor. We then use textual analysis to identify how important the deficiencies are to clients to measure each client's exposure to deficient auditing. We find this measure positively relates to audit fees and that this association is moderated by client bargaining power. Auditor turnover is also higher when deficiency exposure is high relative to what it would be for peer auditors, but we only observe this relation for smaller clients and do not find it is affected by client bargaining power. Finally, we find companies switching Big 4 auditors tend to select an auditor resulting in lower deficiency exposure. These results have implications for understanding how PCAOB inspection reports affect the market for audit services.

Keywords: PCAOB inspections, audit fees, auditor turnover

JEL Classification: M41, M42

Suggested Citation

Acito, Andrew and Hogan, Chris E. and Mergenthaler, Richard Dean, The Effects of PCAOB Inspections on Auditor-Client Relationships (May 31, 2017). Available at SSRN: https://ssrn.com/abstract=2991672

Andrew Acito (Contact Author)

Virginia Tech ( email )

Blacksburg, VA 24060
United States
3193211306 (Phone)

Chris E. Hogan

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

Richard Dean Mergenthaler

The University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States
520-621-2929 (Phone)
520-621-3742 (Fax)

HOME PAGE: http://https://accounting.eller.arizona.edu/people/rick-mergenthaler

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,006
PlumX Metrics