The Effect of PCAOB Inspections on Corporate Innovation: Evidence from Deficiencies about the Valuation of Intangibles

Review of Accounting Studies, Forthcoming

50 Pages Posted: 4 Aug 2022 Last revised: 29 Dec 2022

See all articles by Jungbae Kim

Jungbae Kim

Singapore Management University - School of Accountancy

Date Written: July 31, 2022

Abstract

I examine the economic consequences on corporate innovation when PCAOB inspections cite auditors for insufficient procedures in auditing the valuation of intangibles. I find that the clients of deficient auditors recognize larger and timelier impairments of intangibles, suggesting that affected auditors increase scrutiny about the valuation of intangibles in subsequent audits. This effect obtains only for valuation-related deficiencies and is salient for the clients of auditors who receive such deficiencies repeatedly. I also document real effects that the clients of deficient auditors exhibit less use of external mergers and acquisitions—which yield recognizable intangibles whose valuation is subject to increased auditor scrutiny. Overall, these results suggest that the intervention by the PCAOB effectively alters the measurement of intangibles and perhaps unintentionally affects how clients invest in corporate innovation.

Keywords: PCAOB, Innovation, Intangibles, Impairments, M&A, R&D

JEL Classification: G32, G34, L24, M4, O32

Suggested Citation

Kim, Jungbae, The Effect of PCAOB Inspections on Corporate Innovation: Evidence from Deficiencies about the Valuation of Intangibles (July 31, 2022). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4177115 or http://dx.doi.org/10.2139/ssrn.4177115

Jungbae Kim (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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