The Economic Consequences of Audit Firms’ Quality Control System Deficiencies
Management Science, Forthcoming
73 Pages Posted: 4 Aug 2016 Last revised: 14 Jan 2019
Date Written: January 7, 2019
This study seeks to determine the role of audit firms’ quality control (QC) system deficiencies, as measured by the Public Company Accounting Oversight Board (PCAOB) inspection program, on audit quality and profitability. Using a unique dataset of firm-wide QC deficiencies identified by the PCAOB during its inspections of audit firms, I find a negative association between QC deficiencies, mainly performance-related, and audit quality. Furthermore, audits conducted by larger audit firms with more organization-level deficiencies appear less profitable, evidenced by more hours worked on the engagements, leading to lower fees per hour. These results appear to be partly explained by deficiencies in the tone at the top (a proxy for culture) and the audit methodology. Further evidence suggests that lack of remediation of QC system deficiencies has a negative influence on audit quality.
Keywords: Audit Quality, Audit Efficiency, Quality Control Systems, PCAOB Inspections, Culture, Audit Methodology, Impact of Regulation
JEL Classification: M42, M48, M14, L51
Suggested Citation: Suggested Citation