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    Are PCAOB-Identified Audit Deficiencies Associated with a...
    research summary posted November 10, 2014 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 09.0 Auditor Judgment, 09.04 Going Concern Decisions 
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    Title:
    Are PCAOB-Identified Audit Deficiencies Associated with a Change in Reporting Decisions of Triennially Inspected Audit Firms?
    Practical Implications:

    Our findings seem to support statements made by the PCAOB regarding the usefulness of the inspection process in changing audit firm behavior.

    The change in GC reporting decisions that we find suggests either (1) an increased conservatism following a PCAOB inspection, of the audit firm on important reporting issues, and/or (2) an increased level of competence brought to the reporting decision.

    It is important to note that we find no change in the accuracy of the GC opinions, as measured by the future bankruptcy (or not) for clients that received a GC opinion.

    For more information on this study, please contact Jayanthi Krishnan.

    Citation:

    Gramling, A.A., J. Krishnan and Y. Zhang. 2011. Are PCAOB-Identified Audit Deficiencies Associated with a Change in Reporting Decisions of Triennially Inspected Audit Firms? Auditing: A Journal of Practice and Theory 30 (3): 59-79.

    Keywords:
    PCAOB inspection reports; going-concern; audit deficiencies.
    Purpose of the Study:

    At a broad level, we are obtaining evidence on whether the PCAOB inspection process is associated with changes in auditor behavior. More specifically, we examine whether PCAOB-identified audit deficiencies are associated with a change in triennially inspected audit firms’ going concern (GC) reporting decisions for their financially distressed clients. 

    Design/Method/ Approach:

    We obtained PCAOB inspection reports, dated between 01/01/2005 and 12/31/2007, from the PCAOB website. These reports covered PCAOB inspections of audits completed by the audit firms during 2004-2007. For the audit firms included in the sample, we read the inspection reports to identify those that indicated audit deficiencies. Data on GC opinions were obtained from Audit Analytics. The final sample on which we base our results consists of 202 audit firms and 1,648 client-year observations. The sample clients are distributed across a wide spectrum of industries, with over 50 two-digit SIC industries represented.

    Findings:
    • Firms with PCAOB-identified audit deficiencies were more likely to issue GC opinions for financially distressed clients subsequent to their PCAOB inspection than prior to their inspections.
    • While there was a change in behavior, the change does not suggest an improvement in reducing Type I errors (i.e., issuing a GC opinion to clients that subsequently remain viable) or Type II errors (i.e., failure to issue a GC opinion to a client that subsequently declares bankruptcy). Additional analysis indicates no systematic change in Type I and Type II errors following the issuance of a PCAOB report.
    • We find limited evidence of a change in the likelihood of issuing a GC opinion for audit firms that had no PCAOB-identified audit deficiencies. This finding suggests that the inspection reports without identified audit deficiencies have some, but limited, impact on changing audit firm behavior.
    Category:
    Auditor Judgment, Standard Setting
    Sub-category:
    Going Concern Decisions, Going Concern Decisions, Impact of PCAOB