Does PCAOB inspection access improve audit quality? An examination of foreign firms listed in the United States

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24 Citations (Scopus)

Abstract

To gain insight into the impact of the Public Company Accounting Oversight Board's (PCAOB) auditor inspection program, I examine the association between the PCAOB's access to inspect auditors of foreign SEC registrants and audit quality. Although the PCAOB is mandated to inspect all auditors of SEC registrants, certain foreign governments prohibit PCAOB inspections of their domestic auditors, providing variation in PCAOB inspection access that is not available when studying a sample of US companies. I find that auditors subject to PCAOB inspection access provide higher quality audits as measured by more going concern opinions, more reported material weaknesses, and less earnings management, relative to auditors not subject to PCAOB inspection access. There is no observable difference between the two sets of auditors prior to the PCAOB inspection regime. The positive effect of PCAOB inspection access on audit quality is observed in jurisdictions with, and without, a local audit regulator. Overall, the results are consistent with PCAOB inspection access being positively associated with audit quality.

Original languageEnglish (US)
Pages (from-to)313-337
Number of pages25
JournalJournal of Accounting and Economics
Volume61
Issue number2-3
DOIs
StatePublished - Apr 1 2016

Fingerprint

Oversight
Inspection
Audit quality
Foreign firms
Auditors
Material weakness
Earnings management
Quality audit
Government
PCAOB
Going concern opinion
Jurisdiction
Audit

Keywords

  • Audit quality
  • Audit regulation
  • G18
  • Going concern
  • Internal control weakness
  • L51
  • M49
  • PCAOB

ASJC Scopus subject areas

  • Accounting
  • Economics and Econometrics
  • Finance

Cite this

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abstract = "To gain insight into the impact of the Public Company Accounting Oversight Board's (PCAOB) auditor inspection program, I examine the association between the PCAOB's access to inspect auditors of foreign SEC registrants and audit quality. Although the PCAOB is mandated to inspect all auditors of SEC registrants, certain foreign governments prohibit PCAOB inspections of their domestic auditors, providing variation in PCAOB inspection access that is not available when studying a sample of US companies. I find that auditors subject to PCAOB inspection access provide higher quality audits as measured by more going concern opinions, more reported material weaknesses, and less earnings management, relative to auditors not subject to PCAOB inspection access. There is no observable difference between the two sets of auditors prior to the PCAOB inspection regime. The positive effect of PCAOB inspection access on audit quality is observed in jurisdictions with, and without, a local audit regulator. Overall, the results are consistent with PCAOB inspection access being positively associated with audit quality.",
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