The Struggle for Authority Over the U.S. Audit Profession: An Analysis of the PCAOB’s Inspection Findings and Auditors’ Responses

64 Pages Posted: 2 Oct 2017 Last revised: 31 Mar 2019

See all articles by Matthew Ege

Matthew Ege

Texas A&M University - Department of Accounting

W. Robert Knechel

University of Florida - Fisher School of Accounting

Phillip T. Lamoreaux

Arizona State University

Eldar Maksymov

Arizona State University (ASU) - School of Accountancy

Date Written: March 20, 2019

Abstract

Research on professionalization suggests that as new regulators establish their authority, regulatees initially resist and regulators respond by reinforcing their authority. Using this professionalization lens, we empirically investigate whether the tone that auditors used in response letters to the Public Company Accounting Oversight Board (PCAOB) inspection reports correlates with future inspection outcomes. We find that in the early years of the PCAOB’s inspection program (2004-2008), annually-inspected auditors expressed disagreement and utilized negative tone within response letters, but ceased this practice in later years (2010-2012). We find that negative tone within response letters is positively associated (1) with future Part I inspection findings that result in a financial restatement and reissuance of an audit opinion and (2) with the likelihood that Part II of a future inspection report is publicly disclosed. To gain insights into these associations, we conduct semi-structured interviews of eight PCAOB inspectors and six audit partners involved in these interactions. Each group provided a contrasting view of these interactions. On their part, partners suggest that the PCAOB inspected to their own interpretation of the auditing standards and focused on areas of disagreement in subsequent inspections. In contrast, inspectors suggest that disagreement signaled that a firm’s satisfactory remediation of a deficiency was unlikely and, thus, follow-up was warranted. Both partners and inspectors reported that firms eventually stopped publicly disagreeing with the PCAOB because it was not beneficial to do so.

Keywords: PCAOB, Audit Regulation, Regulatory Incentives, Auditor Inspections

JEL Classification: M41, M42

Suggested Citation

Ege, Matthew and Knechel, W. Robert and Lamoreaux, Phillip T. and Maksymov, Eldar M., The Struggle for Authority Over the U.S. Audit Profession: An Analysis of the PCAOB’s Inspection Findings and Auditors’ Responses (March 20, 2019). Mays Business School Research Paper No. 3045223. Available at SSRN: https://ssrn.com/abstract=3045223 or http://dx.doi.org/10.2139/ssrn.3045223

Matthew Ege

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

W. Robert Knechel

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

Phillip T. Lamoreaux (Contact Author)

Arizona State University ( email )

Tempe, AZ 85287
United States

Eldar M. Maksymov

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

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