The Unintended Consequences of the Frequency of PCAOB Inspection

After more than 50 years of self‐regulation of the US auditing profession, the Sarbanes‐Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) as a quasi‐governmental entity with statutory authority to inspect accounting firms that audit public clients. The frequency of this inspection is annual or triennial, based upon the number of public clients the firm audits. We examine the effects of these two levels of inspection frequency on financial reporting quality and audit fees for clients of small and midsize public accounting firms. Our findings provide evidence of significantly higher audit quality and audit fees for clients of annually inspected firms relative to clients of triennially inspected firms. These findings are robust to auditor‐client alignment analyses, propensity score matching, time‐series analyses, examination of firms that have changed from triennial to annual inspection, and particular examination of firms with inspection deficiencies. Overall, our study suggests that the two‐tier frequency system of PCAOB inspection may have also resulted in two‐tier audit quality and audit fee systems for small and midsize public accounting firms, with more frequent inspection leading to more rigorous and informed auditor decisions. We discuss the implications of our results for the Board and the profession at large.     

Audit Market Response to PCAOB Censures of US Big 4 Firms

Abstract

Subsequent to the first-ever Public Company Accounting Oversight Board (PCAOB) censure of a US Big 4 firm (Deloitte) in December 2007, there were two other PCAOB US Big 4 firm censures as of 2016 year-end. We examine whether these two post-2007 PCAOB censures of US Big 4 firms conveyed new information to the audit market. For both censures, we find little or no evidence of any change in the factual audit quality of the censured firm over a three-year window surrounding the censure. Our findings suggest that the quality control deficiencies (identified during inspection of specific audit engagements) that triggered the PCAOB censure were isolated occurrences rather than systemic to the firm at large, i.e., the censures do not imply an impairment in the US Big 4 firm's overall factual audit quality. We also find that the negative response of investors and audit committees documented in prior research for the 2007 Deloitte censure disappeared for the later US Big 4 firm censures. Given that the PCAOB inspects (and can censure) non-US auditors who audit US-listed foreign companies, our findings are of potential interest to regulators, investors and audit committees outside the US.     

会计师事务所鉴证企业内控报告的理性思考

本文以《萨班斯-奥克斯利法案》第404号条款、美国公众公司会计监督委员会颁布实行的第二号审计准则以及我国于2006年7月1日推出的《上海证券交易所上市公司内部控制指引》作为开展研究的社会历史背景，把会计师事务所作为一个外部的审计实体，对于鉴证企业内控报告这项新业务的开展，探讨其在现实经济生活中的重要性及实际开展中可能存在的问题，并就完善内控报告鉴证业务的实际开展提出建议。     

Reining in auditors: On the dynamics of power surrounding an “innovation” in the regulatory space

In the aftermath of Enron and the collapse of Arthur Andersen, new “independent” institutions were created to oversee financial auditing. Based on a modified version of Lukes’ multidimensional model of power, we first investigate how the creation of the Canadian Public Accountability Board (CPAB) has affected the dynamics of power among the main players enlisted in Canada’s regulation of public accounting. Our findings strengthen the view that a “form of allegiance” was, at the time of data collection, developing between CPAB and the largest Canadian accounting firms. Through a second analytical movement, we extend the boundaries of our argument, showing that patterns of resistance against the logic of arm’s length regulation operate in a variety of audit regulatory sites. Our conclusion points, in particular, to the spatial gap - and incidentally the limitations - of any attempt to control and supervise a globalized industry from a national or regional perspective.     

Including audit regulation in the accounting curriculum

Audits and auditors are regulated to uphold audit quality, thus regulation is important to the public interest and clearly impacts firms and CPAs. Moreover, the reach of audit regulation has expanded greatly in the last decade with the establishment of the Public Company Accounting Oversight Board (PCAOB). Recent research and calls from the profession point to enhancing the coverage of audit regulation in the accounting curriculum so that students understand the consequences of failing to adhere to professional standards. In this paper, we propose regulatory content for inclusion in the curriculum, we survey and catalog existing auditing textbooks and other educational materials for regulatory content, and we suggest flexible alternatives for incorporating this topic into the curriculum. It is our hope that, with these resources, faculty can more effectively include audit regulation in the classroom and achieve a high level of student comprehension and learning on the topic.     

注册会计师行业独立型监管模式有效性研究——基于美国PCAOB运作情况的分析

独立型监管机构具有更高的独立性、更大的法定权威和更集中的监管权限等有利条件,但缺乏基于社会声誉的权威,同时存在外部约束弱化、过度监管和行业专门知识利用不足等问题.独立型监管模式的有益经验值得借鉴,但必须注意其有效性不是无条件的.我国可考虑设立类似于美国PCAOB的相对独立、专司其职、权限集中、有充分法律授权和充足经费保障的监管机构,但须深入分析我国国情,设计出在权威、激励和知识三个维度上均能提高监管效率的改革方案.     

Standard-setting in auditing: Insights from PCAOB inspections

We explore whether the Public Company Accounting Oversight Board (PCAOB) consistently follows its own standard-setting policies. We do this using a methodology that combines the reports of audit partners, the timing of enacted auditing standards, and the issuance of PCAOB inspection findings. Rules governing standard-setting are critical to ensure that auditing standards are appropriate, efficient, and are therefore likely to be generally accepted. Our results suggest that in some instances auditors were penalized for omitting evidence from their working papers which is not specified in the standards, in effect, changing or removing auditor judgment in the amount and nature of audit evidence to be gathered in corroboration of management’s assertions and creating new auditing standards outside of the formal standard-setting process. Beyond the societal benefits of standard-setters adhering to their own policy-making rules, changes in auditing procedures impact the behavior of both auditors’ and managers and is costly. Although subject to limitations, we believe our results are informative to policy makers and other participants in PCAOB standard-setting.     

Do practitioner assessments agree with academic proxies for audit quality? Evidence from PCAOB and internal inspections

This study investigates the degree of concordance between fifteen measures of audit quality used in academia and two measures of audit process quality determined either by audit firms’ internal inspections or by Public Company Accounting Oversight Board inspections of individual engagements. Using two confidential datasets of these assessments of audit process quality, I find that three of the measures of audit quality used by academics have significant associations with both measures of audit process deficiencies used by auditors and regulators: (i) the propensity to restate financial statements, (ii) the propensity to meet or beat the zero earnings threshold, and (iii) audit fees. Seven academic proxies are significantly associated with only one audit process quality measure, and five have insignificant associations with both practitioner assessments. Overall, the significant associations indicate that practitioners and academics share common ground in identifying low-quality audits. These findings can provide guidance for future studies in selecting audit-quality proxies suitable for different research questions.     

Audit Regulation and Cost of Equity Capital: Evidence from the PCAOB's International Inspection Regime*

This study investigates the relation between audit regulation and cost of equity capital. There is scant empirical evidence on this relation because changes in audit regulation are frequently accompanied by other major regulatory changes. We exploit variation in the timing of regulatory changes induced by foreign governments' staggered allowance of PCAOB inspections. Using a difference-in-differences design, we find that foreign SEC registrants with auditors from countries that allow PCAOB inspections enjoy a lower cost of capital, relative to foreign SEC registrants with auditors from countries that prohibit inspections. Furthermore, we find that this cost of capital effect is attenuated for companies with higher-quality governance mechanisms. Finally, we document that inspection access is associated with higher-quality analyst forecasts, which suggests that this change in audit regulation reduces information risk for market participants.     

Do PCAOB Inspections Improve the Accuracy of Accounting Estimates?

Despite issuing extensive guidance related to the evaluation of accounting estimates, the PCAOB continues to identify deficiencies related to the audit of estimates through their inspections process. We examine whether PCAOB inspections lead to more accurate audited accounting estimates, defined as those that more closely match economic reality, by examining a significant estimate within the banking industry. We find that in contrast with the PCAOB's goal of more accurate and unbiased estimates, allowance for loan losses (ALL) estimates become less accurate and more conservative with higher levels of ALL‐related inspection findings for public company audits. We find no evidence of auditor response to PCAOB inspection findings for private‐company audits, which are not subject to PCAOB inspection. Overall, our findings cast doubt on the efficacy of PCAOB inspections in improving estimate accuracy and suggest that firms are managing inspection risk to the potential detriment of audit quality.