Do PCAOB Inspections Improve Working Capital Accrual Reliability? Evidence from PCAOB Annual versus Triennial Inspection Exposure

Forthcoming in Accounting Horizons DOI/10.2308/horizons-17-180

45 Pages Posted: 8 Mar 2020

See all articles by Cheol Lee

Cheol Lee

Wayne State University

Jong Eun Lee

Department of Accounting; SUNGKYUNKWAN UNIVERSITY

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business

Date Written: January 12, 2020

Abstract

In this study, we examine whether the ability of working capital (WC) accruals to predict future earnings and cash flows differs between registrants whose auditors are subject to annual Public Company Accounting Oversight Board (PCAOB) inspections and those whose auditors are subject to triennial PCAOB inspections. We find that WC accruals of clients audited by auditors subject to annual PCAOB inspections enhance earnings persistence more and map into future cash flow realizations better than those audited by auditors subject to triennial PCAOB inspections. These findings are stronger for operating asset accruals than for operating liability accruals. Furthermore, after PCAOB inspection reports are released, improvements in WC accruals reliability are more evident for clients audited by annually inspected auditors than for clients audited by triennially inspected auditors. Overall, our findings suggest that more frequent PCAOB inspections help to improve WC accrual reliability.

Keywords: Frequency of PCAOB inspection; Working capital accruals; Earnings persistence; Cash flow mapping

JEL Classification: M41; M42; M48

Suggested Citation

Lee, Cheol and Lee, Jong Eun and Lee, Jong Eun and Park, Myung Seok, Do PCAOB Inspections Improve Working Capital Accrual Reliability? Evidence from PCAOB Annual versus Triennial Inspection Exposure (January 12, 2020). Forthcoming in Accounting Horizons DOI/10.2308/horizons-17-180, Available at SSRN: https://ssrn.com/abstract=3537254

Cheol Lee (Contact Author)

Wayne State University ( email )

United States
313-577-2242 (Phone)

Jong Eun Lee

Department of Accounting ( email )

53 Myeongnyun-dong 3-ga Jongno-gu
#418 Business School Building
Seoul, 110-745
Korea, Republic of (South Korea)

SUNGKYUNKWAN UNIVERSITY ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business ( email )

301 W. Main St.
School of Business
Richmond, VA 23284-4000
United States
(804)828-3161 (Phone)

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