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
Date Written: July 31, 2022
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: Suggested Citation