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    Who Did the Audit? Audit Quality and Disclosures of Other...
    research summary posted October 19, 2015 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.02 Changes in Audit Standards, 11.0 Audit Quality and Quality Control 
    Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings.
    Practical Implications:

    The study results are important to regulators and audit practitioners as they show the differential audit quality for participating auditors used in issuer audits. The results show that audit quality declines when audit engagements use participating auditors that are not experienced in auditing SEC issuers. This indicates that public disclosure of the principal and participating auditors in the audit report can provide useful information to evaluate audit quality.  


    Dee, C.C., A. Lulseged, and T. Zhang. 2015. Who Did the Audit? Audit Quality and Disclosures of Other Audit Participants in PCAOB Filings. The Accounting Review 90 (5): 1939-1967.

    PCAOB, audit quality, earnings quality, other audit participants
    Purpose of the Study:

    The Public Company Accounting Oversight Board (PCAOB) introduced in 2011 and re-proposed in 2013, an auditing standard that would require audit reports of SEC issuers to disclose participants in the audit other than the principal auditor. The PCAOB introduced the proposal to provide investors with full disclosure of the participants in the audit process, including affiliated firms of international audit firm networks. The underlying assumption of the proposed standard is that participating auditor involvement may negatively effect audit quality.   However, using a participating auditor may not effect audit quality due to the market pressure on the principal auditor to maintain high audit quality. The authors investigate whether the proposed standard would provide market participants with additional information to evaluate audit quality.

    The paper addresses whether there is a difference in audit quality between issuer audits with and without participating auditors. Using publicly available PCAOB filings, the authors identify an issuer sample that uses a participating auditor and a control sample that does not. The use of PCAOB filings allows the authors to identify participating auditors with limited experience in serving as a principal auditor for an issuer audit. The authors believe these auditors have a higher likelihood of low audit quality. If audit quality is not reduced using this auditor population, there is lower likelihood that audit quality reductions would occur in an expanded auditor sample. However, if audit quality is reduced, it would provide evidence that the proposed standard would benefit market participants in assessing audit quality.   

    Design/Method/ Approach:

    The authors employ an archival research methodology in this study and obtain PCAOB Form 2 filings from 2010-2012 to identify the sample. The study includes an experimental sample (use a participating auditor) and a control sample (does not use a participating auditor). To assess differences in audit quality, the authors use four proxies: cumulative abnormal returns, earnings response coefficients, discretionary accruals, and audit fees.

    • The authors find that cumulative abnormal returns are significantly negative in the one, two, and three days after the public disclosure of a participating auditor for the experimental sample. For the control sample, the cumulative abnormal returns are not significantly different from zero. This finding shows that the initial disclosure of the participating auditor is informative to the market.
    • In the earnings response coefficient analysis, the market valuation of earnings surprises decreases in the quarters subsequent to the public disclosure of the participating auditor. 
    • When evaluating discretionary accruals, the authors find that performance-adjusted discretionary accruals are higher for the experimental sample issuers when compared to the control sample. 
    • Using audit fees as a measure of audit quality, the results did not show a reduction in audit fees for the experimental sample issuers compared to the control sample.
    • Overall, the results show that the public disclosure of SEC issuer engagements with participating auditors provides the market with information that is beneficial in assessing audit quality.  
    Audit Quality & Quality Control, Standard Setting
    Changes in Audit Standards