The PCAOB Revolving Door and Audit Quality

58 Pages Posted: 30 Jul 2020

See all articles by Jagan Krishnan

Jagan Krishnan

Temple University - Department of Accounting

Jayanthi Krishnan

Temple University - Department of Accounting

Steven Maex

Temple University - Department of Accounting

Date Written: July 8, 2020

Abstract

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

Krishnan, Jagan and Krishnan, Jayanthi and Maex, Steven, The PCAOB Revolving Door and Audit Quality (July 8, 2020). Available at SSRN: https://ssrn.com/abstract=3648214 or http://dx.doi.org/10.2139/ssrn.3648214

Jagan Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Fox School of Business & Management
1801 Liacorous Walk
Philadelphia, PA 19122
United States
215-204-8126 (Phone)
215-204-5587 (Fax)

Jayanthi Krishnan

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-3085 (Phone)

Steven Maex

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

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