Did the PCAOB’s 2009 Office Expansion Improve Audit Quality?

Abstract

We investigate whether the PCAOB’s decision to expand the number and location of its inspection offices in 2009 improved the reliability of U.S. audits. We use a difference-in-differences empirical design to consider the impacts of the expansion on audit quality and find that audit quality significantly improved following the PCAOB’s expansion in markets where new offices opened relative to markets without an office opening. We find that the improvement in audit quality appears to be driven by auditors’ reaction to real changes in PCAOB oversight and that triennially inspected auditors appear to be impacted the most by this office expansion. Our findings provide new insights into the PCAOB’s operational decision making and suggest that the regulator’s additional investment in audit oversight was effective in improving audit quality.

Keywords: Public Company Accounting Oversight Board (PCAOB); auditor oversight; audit quality

JEL Classification: M40; M41; M42; M48