The impact of the pcaob individual engagement inspection process-preliminary evidence

Daniel Aobdia*

*Corresponding author for this work

Research output: Contribution to journalArticle

13 Scopus citations

Abstract

This study investigates the impact on auditors' and clients' activities of Public Company Accounting Oversight Board (PCAOB) inspections of individual engagements. I find that both auditors and clients react to a Part I Finding, which identifies audit deficiencies on their inspected engagements. Audit firm effort increases on inspected engagements and non-inspected engagements of offices or partners that receive a Part I Finding, suggesting direct, as well as spillover, effects of the PCAOB inspections. The client is also more likely to switch auditors. However, auditor effort and financial reporting quality subsequently decline for inspected engagements that did not receive a Part I Finding. In these cases, clients are less likely to switch auditors. Additional analyses show that the auditor reaction depends on whether the auditor is an industry specialist, the client reaction depends on the size of the auditor, and effects on financial reporting quality depend on whether the deficiency is a firm-wide issue. Overall, these results suggest that both audit firms and clients care about the PCAOB individual engagement inspection process and, in several instances, gravitate toward the level set by the Part I Finding bar.

Original languageEnglish (US)
Pages (from-to)53-80
Number of pages28
JournalAccounting Review
Volume93
Issue number4
DOIs
StatePublished - Jul 2018

Keywords

  • Audit quality
  • Auditor effort
  • Auditor switches
  • Impact of regulation
  • PCAOB inspections

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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