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  • Jennifer M Mueller-Phillips
    PCAOB Quality Control Inspection Reports and Auditor...
    research summary posted February 15, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 11.0 Audit Quality and Quality Control, 11.11 Impact of Firm and External Inspection Programs in Auditing Section Research Summaries Space public
    Title:
    PCAOB Quality Control Inspection Reports and Auditor Reputation
    Practical Implications:

    The results of this study are important in considering what should be produced from PCAOB inspections of audit firms. Evidence indicates that clients use the information provided by Part II of the PCAOB inspection reports to choose a high quality audit firm. Perhaps producing a quality control report with every PCAOB inspection report would be helpful to clients in analyzing the audit firm and potentially improving overall audit quality.

    For further information on this study, please contact Albert L. Nagy.

    Citation:

    Nagy, Albert L. 2014. PCAOB Quality Control Inspection Reports and Auditor Reputation. Auditing: A Journal of Practice & Theory 33 (3): 87-104.

    Keywords:
    audit quality signals, PCAOB inspections, quality controls
    Purpose of the Study:

    This study focuses on the informational value of the quality control criticisms disclosed in Part II of PCAOB inspection reports. Part II of the report becomes public only if a firm fails to satisfactorily remediate the quality control deficiencies within a 12-month period. This study examines the change in audit firms' market share following the public disclosure of Part II. The results show that audit firms lose a significant amount of market share following the public disclosure of quality control criticisms, and suggest such a disclosure provides a credible signal of auditor quality to audit clients.

    Design/Method/ Approach:

    Firms analyzed were United States based, non-dark audit firms included in the Audit Analytics database from 2007 to 2012. All firms were inspected by the PCAOB and reports were posted on the PCAOB website. The market share changes for the quality control (QC) report release were measured for the year immediately following the public disclosure of the QC report. The non-QC report observations’ market changes were measured for the calendar years of the sample period.  The sampled observations were used to estimate an OLS regression model to determine whether QC reports have an effect on changes of audit firms’ market share.  

    Findings:

    The regression results of this study show that audit firms associated with publicly disclosed QC reports lose a greater amount of market share in the subsequent year than those firms not associated with a QC report. These results suggest that audit clients associate QC reports as a credible signal of low audit quality and, thus, are less likely to retain and hire audit firms involved with such a report. 

    Category:
    Audit Quality & Quality Control, Standard Setting
    Sub-category:
    Impact of Firm & External Inspection Programs, Impact of PCAOB