Does PCAOB Inspection Access Improve Audit Quality? An Examination of Foreign Firms Listed in the United States
Journal of Accounting and Economics (Forthcoming)
Posted: 13 Feb 2016
Date Written: February 12, 2016
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.
Keywords: PCAOB, audit regulation, audit quality, going concern, internal control weakness
JEL Classification: G18, L51, M49
Suggested Citation: Suggested Citation