Do Blockades to PCAOB Inspections Suggest Lower Audit Quality? The Case of Chinese Companies Listed in the U.S.

Abstract

Recently, the SEC adopted rules for the Holding Foreign Companies Accountable Act which bars trading of securities of companies whose auditors are not inspected by the PCAOB. Currently, the PCAOB is unable to inspect the audit work papers of Chinese audit firms that audit U.S.-listed Chinese companies with a total market capitalization of about $2 trillion as of May 2021. Using a sample of 439 pairs of Chinese and U.S. companies matched on industry, company size, and year, we do not observe a significant difference across multiple audit quality proxies. Further, the proportion of companies audited by the Big 4 auditors is higher for the U.S.-listed Chinese companies than their U.S. counterparts. We also find that earnings informativeness is marginally higher for U.S.-listed Chinese companies. Overall, our findings suggest that the lack of inspection by the PCAOB does not result in lower audit quality. Our finding of insignificant differences in audit quality between U.S.-listed Chinese companies and U.S. companies could be due to greater audit efforts by Chinese auditors to bridge the perception gap in audit quality resulting from the lack of inspections by the PCAOB.

Keywords: PCAOB inspections; China; earnings quality; audit quality; ERC