Article2014

PCAOB Quality Control Inspection Reports and Auditor Reputation

106 citations0/0 files storedAuditing A Journal of Practice & Theory

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Auditing, Earnings Management, Governance Corporate Identity and Reputation Corporate Governance and Financial Management

Abstract

SUMMARY: In 2002, the peer review auditor program was replaced with independent inspections of audit firms by the Public Company Accounting Oversight Board (PCAOB). The PCAOB inspections differ from the peer reviews in several key areas including the independence level of the reviewers, the nature and timing of the reviews, and the content and timing of the findings' disclosures. This study focuses on the informational value of the quality control criticisms disclosure included in Part II of the PCAOB inspection reports. After each inspection, the PCAOB issues inspection reports that include a public portion (Part I) of identified audit deficiencies, and most include a nonpublic portion (Part II) of identified quality control weaknesses. Part II of the report only becomes public if the firm fails to satisfactorily remediate the quality control deficiencies in a 12-month period. This study examines the change in audit firms' market share following the public disclosure of Part II of the inspection report. The results find that audit firms lose a significant amount of market share following the public disclosure of quality control criticisms, and suggest that such a disclosure provides a credible signal of auditor quality to audit clients.

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References

2005Audit Research after Sarbanes-Oxley 2007The Goals and Promise of the Sarbanes–Oxley Act 2008Does Auditor Reputation Matter? The Case of KPMG Germany and ComROAD AG 2011The effect of SOX on small auditor exits and audit quality 2009Auditing the auditors: Evidence on the recent reforms to the external monitoring of audit firms 2002The Sarbanes-Oxley Act of 2002 2005Who Cares about Auditor Reputation?*2009PCAOB inspection reports and audit quality

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2017The Effects of PCAOB Inspections on Auditor-Client Relationships 2018Public Oversight of Audit Firms: The Slippery Slope of Enforcing Regulation 2019The Economic Consequences of Audit Firms’ Quality Control System Deficiencies 2015Do Income Tax-Related Deficiencies in Publicly Disclosed PCAOB Part II Reports Influence Audit Client Financial Reporting of Income Tax Accounts?2020Insights into Auditor Public Oversight Boards: Whether, How, and Why they 'Work'2016

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