A Multi-Method Analysis of the PCAOB’s Relationship With the Audit Profession

Posted: 2 Oct 2017 Last revised: 14 May 2020

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 27, 2020

Abstract

Responsive regulation (RR) theory posits that effective regulators enforce compliance by escalating penalties only if persuasion fails, otherwise risking formation of a culture of resentment. Using RR theory as a lens, we examine the interactions between large audit firms and the PCAOB during the initial years of PCAOB regulation, when annually-inspected auditors utilized negative tone within their inspection response letters to express public disagreement with their inspection reports. Consistent with our expectations, we find that negative tone within response letters is positively associated with (1) future Part I inspection findings that result in a restatement of a client’s financial statements and (2) the likelihood that Part II of a future inspection report will be publicly disclosed. We triangulate these results and the underlying theory in semi-structured interviews of eight PCAOB inspectors and six audit partners involved in these early interactions between the largest firms and the PCAOB. Consistent with RR theory, the PCAOB viewed public disagreement as indicators of noncompliance, incorporated public disagreement into subsequent inspections, and escalated penalties for noncompliance. Contrary to RR theory’s prescriptions, the PCAOB did not use persuasion as a first reaction to noncompliance. In response, the firms stopped publicly disagreeing, but may have formed a culture of resentment toward the PCAOB.

Keywords: PCAOB, Audit Regulation, Auditor Inspections, Responsive Regulation Theory

JEL Classification: M41, M42

Suggested Citation

Ege, Matthew and Knechel, W. Robert and Lamoreaux, Phillip T. and Maksymov, Eldar M., A Multi-Method Analysis of the PCAOB’s Relationship With the Audit Profession (March 27, 2020). Accounting, Organizations and Society, Forthcoming, 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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