This study should be of interest to audit regulators around the world currently employing or contemplating the employment of firm-specific reporting formats. A critical and consistent feature of firm-specific reporting is the presence of descriptions of deficiencies uncovered in the inspection process. This study serves to warn audit regulators that reporting lists of deficiencies, as in the manner currently employed by the PCAOB, can lead to misperceptions of audit firm quality. The study also serves to inform audit regulators of two decision aids that the authors found useful in counteracting such misperceptions.
Wainberg, J. S., T. Kida, M. D. Piercey, and J. F. Smith. 2013. The impact of anecdotal data in regulatory audit firm inspection reports. Accounting, Organizations & Society 38 (8): 621-636.
The authors provide initial empirical evidence that Securities and Exchange Commission (SEC) registrants found GAAP-deficient PCAOB inspection reports to be a useful signal of audit quality for triennially inspected auditors. This evidence indicates that PCAOB inspection reports created heterogeneity in auditor brand name that did not previously exist. Also, this paper is the first to empirically link audit committee characteristics to PCAOB inspection report severity and auditor choice. The authors believe this is an increasingly relevant finding as audit committees have been granted much greater auditor dismissal and hiring authority due to SOX. This study indicates that a PCAOB inspection report may serve as an audit quality signal for auditors of broker-dealers, who were previously exempt from the inspection process. Such a finding has current relevance given the PCAOB has recently sought to expand the inspection program to foreign auditors, such as those based in China whose clients are cross-listed on U.S. security exchanges or are listed due to a reverse merger.
Abbott, L. J., K. A. Gunny, and T. C. Zhang. 2013. When the PCAOB Talks, Who Listens? Evidence from Stakeholder Reaction to GAAP-Deficient PCAOB Inspection Reports of Small Auditors. Auditing: A Journal of Practice & Theory 32 (2): 1-31.
Research completed in the past has shown that short-term option compensation weakens audit committee member objectivity and oversight quality; this study confirms these findings. These results encourage investigation toward increasing saliency of the oversight role that the PCAOB plays, further research involving the role of an Engagement Quality Review, and understanding what characteristics of the members of the study led them to react to incentives.
For more information on this study, please contact Julie Persellin.
Persellin, J. S. 2013. The Influence of PCAOB Inspections on Audit Committee Members' Judgments. Behavioral Research in Accounting 25 (2).
This study analyzes the effect of high audit quality for two types of Chinese firms, State Owned Enterprises (SOEs) and Non-State Owned Enterprises (NSOEs). It provides evidence that high audit quality may reduce cost of equity capital and earnings management more for NSOEs than for SOEs. The results of this study are useful for participants in Chinese and other emerging capital markets as well as auditors in these markets.
For more information on this study, please contact Gerald Lobo.
Chen, H., J. Chen, G. Lobo, and Y. Wang. 2011. Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from China. Contemporary Accounting Review 28 (3): 892-925.