PCAOB Inspections and the Differential Audit Quality Effect for Big 4 and Non-Big 4 US Auditors

Posted: 11 Dec 2020

See all articles by Inder K. Khurana

Inder K. Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Nathan G. Lundstrom

University of Kansas

K. K. Raman

The University of Texas at San Antonio

Date Written: July 31, 2020

Abstract

In this study, we investigate whether the increase in regulatory scrutiny epitomized by the initial PCAOB inspection impacted audit quality differentially for Big 4 and non-Big 4 auditors to better understand the consequences of PCAOB inspections for different audit firm types. Because of competing views on the effect of PCAOB inspections, the relation between PCAOB inspections and the audit quality differential between Big 4 and other auditors is an empirical issue. Empirically, we take the endogenous choice of auditor as a given and utilize a difference-in-differences specification that takes into account the staggered timing of the initial PCAOB inspection for different-sized auditors in the US. Our results suggest that the initial PCAOB inspection improved audit quality more for Big 4 auditors than for other annually inspected or triennially inspected non-Big 4 auditors. We also examine annually and triennially inspected non-Big 4 auditors separately, and find that the pre-post Big 4/non-Big 4 differential audit quality effect is more pronounced for the triennially inspected non-Big 4 firms. In the larger context of the highly concentrated US audit market, our findings that PCAOB inspections accentuate the Big 4/non-Big 4 audit quality differential are of potential interest to public company audit clients contemplating an auditor change, investors interested in learning about the consequences of PCAOB inspections, regulators concerned about the Big 4 dominance of the US audit market, and academics investigating audit quality differences.

Keywords: Initial PCAOB inspections, regulatory scrutiny, Big 4 auditors, non-Big 4 auditors

Suggested Citation

Khurana, Inder and Lundstrom, Nathan G. and Raman, K. K., PCAOB Inspections and the Differential Audit Quality Effect for Big 4 and Non-Big 4 US Auditors (July 31, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3735838

Inder Khurana (Contact Author)

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-882-3474 (Phone)
573-882-2437 (Fax)

Nathan G. Lundstrom

University of Kansas ( email )

1654 Naismith Drive
Lawrence, KS 66045
United States

K. K. Raman

The University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8749 (Phone)

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