Do PCAOB Inspections Improve the Accuracy of Accounting Estimates?

53 Pages Posted: 3 Dec 2020

See all articles by Sarah B. Stuber

Sarah B. Stuber

Texas A&M University - Mays Business School

Chris E. Hogan

Michigan State University - Department of Accounting & Information Systems

Date Written: October 20, 2020

Abstract

Despite issuing extensive guidance related to the evaluation of accounting estimates, the PCAOB continues to identify deficiencies related to the audit of estimates through their inspections process. We examine whether PCAOB inspections lead to more accurate audited accounting estimates, defined as those that more closely match economic reality, by examining a significant estimate within the banking industry. We find that in contrast with the PCAOB’s goal of more accurate and unbiased estimates, allowance for loan loss (ALL) estimates become less accurate and more conservative with higher levels of ALL-related inspection findings for public company audits. We find no evidence of auditor response to PCAOB inspection findings for private-company audits, which are not subject to PCAOB inspection. Overall, our findings cast doubt on the efficacy of PCAOB inspections in improving estimate accuracy and suggest that firms are managing inspection risk to the potential detriment of audit quality.

Keywords: estimates, auditor, regulation, PCAOB, allowance for loan losses

JEL Classification: G21, M42, M48

Suggested Citation

Stuber, Sarah and Hogan, Chris E., Do PCAOB Inspections Improve the Accuracy of Accounting Estimates? (October 20, 2020). Available at SSRN: https://ssrn.com/abstract=3715678 or http://dx.doi.org/10.2139/ssrn.3715678

Sarah Stuber (Contact Author)

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

Chris E. Hogan

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

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