The PCAOB Revolving Door and Audit Quality
58 Pages Posted: 30 Jul 2020
Date Written: July 8, 2020
The so-called “revolving door” for employees moving from the Public Company Accounting Oversight Board (PCAOB) to the accounting firms it regulates has received heightened scrutiny recently. Hendricks, Landsman, and Peña-Romera (HLP) (2019) document that large audit firms exhibit improved inspections performance after hiring PCAOB personnel, consistent with an “inspections expertise” hypothesis that these hires help in managing inspection risk. We extend HLP (2019) by examining whether these individuals also bring “technical expertise” that enhances hiring firms’ audit quality. Using a sample of large auditors’ engagements from 2010 to 2016, we document positive associations between audit firms’ employment of former PCAOB employees and multiple audit quality proxies. These associations are stronger for higher misstatement risk clients. The precision of internal control audit opinions also improves in the presence of these individuals. These results suggest that former PCAOB employees are beneficial to firms’ audit quality particularly in areas emphasized by the regulator.
Keywords: Audit Fee, Restatements, Audit Effort, Discretionary Accruals, Regulatory Capture, Social Ties, Internal Controls, Material Weaknesses
JEL Classification: M42, M48
Suggested Citation: Suggested Citation