Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    When the PCAOB Talks, Who Listens? Evidence from Stakeholder...
    research summary posted June 22, 2014 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers, 11.0 Audit Quality and Quality Control, 11.07 Attempts to Measure Audit Quality, 11.11 Impact of Firm and External Inspection Programs 
    180 Views
    Title:
    When the PCAOB Talks, Who Listens? Evidence from Stakeholder Reaction to GAAP-Deficient PCAOB Inspection Reports of Small Auditors.
    Practical Implications:

    The objective of this study is to determine whether PCAOB inspection reports of triennially inspected auditors are used as audit quality signals. The study was based upon the premise that the reports may serve as a publicly-available proxy of perceived audit quality. Clients were found to react differently to the PCAOB inspection reports contingent upon their severity with GAAP-deficient reports are more likely to trigger an auditor dismissal than a clean or GAAS-deficient report. The results suggest that clients of non-Big 4/non-national auditors are using certain PCAOB inspection reports as a publicly-available signal of audit quality and not as a means of procuring more favorable audit reporting or audit fees. 

    Citation:

    Abbott, L., 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 32 (2).

    Keywords:
    audit quality signals, PCAOB inspection process
    Purpose of the Study:

    The PCAOB conducts inspections of registered public accounting firms that provide audits for publicly traded companies. The results of the inspection process are summarized in publicly available reports at the PCAOB website. Using these reports, this study categorizes the inspection reports into three levels of increasing severity: clean, GAAS-deficient, and GAAP-deficient. GAAP-deficient PCAOB inspection reports are examined for potential use as perceived audit quality signals for the clients of GAAP-deficient auditors that are inspected on a triennial basis by the PCAOB. The investigation is predicated on the notion that audit quality is generally not directly observable. Thus the clients of these auditors may seek to signal their desire for audit quality by dismissing their GAAP-deficient auditors.

    Design/Method/ Approach:

    The authors obtained all inspection reports from the PCAOB from January 21, 2005, to December 31, 2007. The sample chosen included 54 GAAP-deficient, triennially inspected auditors with complete data for 379 of the auditors’ reported clients. This sample was used to test the following hypotheses:

    • H1: There is a positive relation between the receipt of a GAAP-deficient PCAOB inspection report and the likelihood of dismissing a triennially inspected auditor in favor of a non-GAAP-deficient auditor.
    • H2: Greater agency conflict values magnify the positive relation between the receipt of GAAP-deficient PCAOB inspection reports and the likelihood of dismissing a triennially inspected auditor in favor of a non-GAAP-deficient, triennially inspected auditor.  
    • H3: Independent and expert audit committees magnify the positive relation between the receipt of a GAAP-deficient PCAOB inspection report and the likelihood of dismissing a triennially inspected auditor in favor of a non-GAAP-deficient, triennially inspected auditor. 
    • H4: Outside blockholdings magnify the positive relation between the receipt of a GAAP-deficient PCAOB inspection report and the likelihood of dismissing a triennially inspected auditor in favor of a non-GAAP-deficient, triennially inspected auditor.
    • H5: Securities issuance magnify the positive relation between the receipt of GAAP-deficient PCAOB inspection report and the likelihood of dismissing a triennially inspected auditor in favor of a non-GAAP-deficient, triennially inspected auditor.
    Findings:
    • Dismissal rate is high for GAAP-deficient auditors
    • A majority of the clients also received a going-concern modification
    • The subsequent auditor is virtually always a triennially inspected auditor that is not GAAP-deficient
    • Agency conflict and audit committee effectiveness are helpful in predicting which GAAP-deficient auditors are more likely to be dismissed.
    Category:
    Audit Quality & Quality Control, Auditor Selection and Auditor Changes
    Sub-category:
    Attempts to Measure Audit Quality, Dismissal Decisions – impact of restatements - disagreements - fees - mergers etc, Impact of Firm & External Inspection Programs
    Home:

    home button