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
Date Written: March 20, 2019
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: Suggested Citation