The revolving door between large audit firms and the PCAOB: Implications for future inspection reports and audit quality

The Accounting Review, 97(1), 261-292

55 Pages Posted: 16 Jul 2018 Last revised: 22 Jan 2022

See all articles by Bradley E. Hendricks

Bradley E. Hendricks

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

F. Dimas Peña-Romera

Arizona State University (ASU)

Date Written: January 1, 2021

Abstract

This study examines whether audit firms hire former PCAOB employees in response to negative PCAOB inspection reports, and whether such hiring leads to reductions in future inspection deficiencies and an increase in audit quality. We find that the number of PCAOB employees hired by large audit firms is positively related to the number of deficiencies reported in their prior inspection report, and that the number of deficiencies reported in firms’ future inspection reports is negatively associated with the number of former PCAOB employees hired. However, we find no significant association between the number of former PCAOB employees that a firm hires and improvement in audit quality. These findings suggest that former PCAOB personnel possess valuable knowledge about how to perform and document audit procedures to satisfy PCAOB reviewers, but that this expertise does not necessarily have direct implications for the accuracy and reliability of clients’ financial reports.

Keywords: Audit Quality, PCAOB, Regulation, Inter-Industry Worker Flows, Revolving Door

JEL Classification: G28, G38, M41, M49

Suggested Citation

Hendricks, Bradley E. and Landsman, Wayne R. and Peña Romera, Francisco Dimas, The revolving door between large audit firms and the PCAOB: Implications for future inspection reports and audit quality (January 1, 2021). The Accounting Review, 97(1), 261-292, Available at SSRN: https://ssrn.com/abstract=3205578 or http://dx.doi.org/10.2139/ssrn.3205578

Bradley E. Hendricks (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
(919) 962-3619 (Phone)

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Francisco Dimas Peña Romera

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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