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Part II of the Public Company Accounting Oversight Board (PCAOB) inspection report is released only when firms fail to remediate quality control criticisms and is intended to be a public signal of audit quality. The purpose of this paper is to reexamine whether audit clients react to the release of Part II of the PCAOB inspection report as a signal of audit quality.

This study uses a difference-in-difference regression model to examine the association between the release of Part II of the PCAOB inspection report and an audit firm’s change in market share. A sensitivity analysis is also performed to determine whether the main findings are robust to the timing of the release of the report and type of quality control criticism included in Part II of the inspection report.

After controlling for the prior year’s changes in market share, the authors find no evidence that clients react to the public release of Part II of the report. In the second part of the study, they examine when clients become aware of the contents of the Part II report prior to its release. Firms with audit performance criticisms experience a decrease in market share following the release of Part I. Firms with firm management criticisms experience a significant decrease in market share following the remediation period and before the public release of Part II.

The results suggest that Part II of the PCAOB inspection report does not provide new information to the market. Clients appear to be aware of the information contained in Part II of the PCAOB inspection report prior to its release. The authors believe that the delay in releasing the Part II report may create an information imbalance, and the PCAOB may want to consider ways to improve the timeliness of the information.

This study questions the generalizability of prior research which finds that Part II of the inspection report provides new information that is valued by the public company audit market as a signal of audit quality. The findings provide new evidence that the contents of Part II and the firm’s ability to remediate the quality control concerns are known to audit clients prior to the public release.

Mandatory auditor firm rotation (mandatory rotation) has been a controversial issue in the United States for many decades. Mandatory rotation has been considered at various times as a means of improving auditor independence. For example, in the United States, the Public Company Accounting Oversight Board (PCAOB) has considered mandatory rotation as a solution to the independence problem (PCAOB, 2011) and the European Parliament approved legislation that will require mandatory rotation in the near future (Council of European Union, 2014). The concept of implementing a mandatory rotation policy has been encouraged by some constituents of audited financial statements and rejected by other constituents of audited financial statements. Although there are apparent pros and cons of such a policy, the developmental process of such a policy in this country has not necessarily been an open-democratic, objective process. Universal mandatory rotation may or may not be the ideal solution; however, an open-democratic, objective process is needed to facilitate the development of a solution that considers the needs of all major stakeholders of audited financial statements – not simply accounting firms and public companies, but also investors. The purpose of this paper is to critically examine key issues relating to mandatory rotation and to encourage and stimulate future research and ongoing dialogue regarding this issue, in spite of efforts by certain constituents to silence the issue. This paper provides an overview of the various reasons, including practical, theoretical, political, and self-motivated reasons, why a mandatory rotation policy has not been implemented in the United States in order to address the potential conflict of interest between the auditor and client. This paper will also discuss how some deliberations of mandatory rotation have been flawed. The paper concludes with a summary of key issues along with two approaches for regulators, policy makers, and academics to consider as ways to improve the process and address auditor independence. The authors are not advocating for any specific solution; however, we are advocating for a more objective, unified approach and for the dialogue regarding auditor rotation to continue.

We investigate the effect of the PCAOB’s Part II report on annually inspected firms’ audit fees and audit quality. The PCAOB replaced the peer review auditor program with an independent inspection of audit firms. Upon completion of each inspection, the PCAOB issued inspection reports that include a public portion (Part I) of identified audit deficiencies, and (in most cases) a nonpublic portion (Part II) of identified quality control weaknesses. The Part II report is only made public when the PCAOB deems that remediation was insuffcient after at least 12 months have passed. Starting around the time of the 2007 Deloitte censure (Boone et al., 2015), the PCAOB shifted from a soft synergistic approach to an antagonistic approach, such that Part II reports were imminent, despite delays that ultimately led to their release one to four years later than expected. Our study spans the period from 2007 to 2015, and examines the effect on audit fees and audit quality at the earliest date that the Part II report could have been released – 12 months after the Part I report was issued. We find that following the 12 month period, that annually inspected audit firms eventually lost reputation by lower audit fees, while they concurrently made remedial efforts to increase the quality of their client’s financial reporting quality (abnormal accruals magnitude and restatements). However, three years after the Part II report was actually released, audit fees increased.

For the past 10 years, the Public Company Accounting Oversight Board (PCAOB) has operated as an independent overseer of public company audits. Over 70 percent of PCAOB studies have been published since 2010, evidencing the increasing relevance of PCAOB-related research in recent years. Our paper reviews the existing literature on the PCAOB’s four primary functions – registration, standard-setting, inspections, and enforcement. In particular, we examine PCAOB registration trends and evaluate the effects of PCAOB registration requirements on the issuer audit market, as well as discuss the relative costs and benefits (e.g., auditor behavior changes, improvements in audit quality, auditor perceptions) of the 16 auditing standards the PCAOB passed in its first 10 years of operation. Further, we summarize the literature’s findings on the effects of the PCAOB inspection process on various facets of audit quality. Finally, we analyze the research concerning the PCAOB’s enforcement actions to determine how markets have responded to sanctions against auditors and audit firms. We contend that understanding and reviewing the effects of the PCAOB’s activities are important to future audit research because of the PCAOB’s authority over and oversight of the issuer audit profession. We also identify PCAOB-related research areas that have not been fully explored and propose several research questions intended to address these research areas.

Using the backdrop of an (apparently) extended visit to the West Indies, analogies with key concerns of internal audit are drawn. An unusual and refreshing way of exploring the main themes ‐ a discussion between Bill and Jack on tour in the islands ‐ forms the debate. Explores the concepts of control, necessary procedures, fraud and corruption, supporting systems, creativity and chaos, and building a corporate control facility.

Using the backdrop of an (apparently) extended visit to the West Indies, analogies with key concerns of internal audit are drawn. An unusual and refreshing way of exploring the main themes ‐ a discussion between Bill and Jack on tour in the islands ‐ forms the debate. Explores the concepts of control, necessary procedures, fraud and corruption, supporting systems, creativity and chaos, and building a corporate control facility.

This paper synthesizes the extant feedback literature, focusing on how feedback affects an auditor’s learning, performance, and motivation. Performance feedback is an important component in the auditing environment for ensuring quality control and for developing and coaching staff auditors. However, the literature on feedback in the audit environment is fragmented and limited making it difficult to assess its behavioral effects on auditors. This paper has three main objectives. The first is to review some of the influential research in psychology and management to identify key variables and issues that appear to be critical in the study of behavioral consequences of feedback in organizational settings. The second is to review performance feedback research specifically in auditing to identify the areas previously examined and synthesize the findings. The third is to suggest a variety of future research opportunities that may assist in developing an understanding and knowledge of the behavioral effects of feedback on auditors. The literature analysis has significant implications for audit research and practice. In particular, the analysis provides important insights into understanding who, how, and when performance feedback should be given to improve its effectiveness in the audit environment.

This paper aims to analyze Public Companies Accounting Oversight Board (PCAOB) inspection reports on audit reports of those inspected accounting firms in Brazil, Russia, India and China (BRIC). In meeting the requirements of the Sarbanes-Oxley Act, the PCAOB conducts inspections on audit reports of firms listed on the New York Stock Exchange.

The reports include those submitted by both the US audit parent firms and their secondary firms located outside the USA. In each PCAOB report, it unravels the nature of audit deficiencies. The focus is on Big Four because they play a dominant role in the marketplace and issuers’ market capitalization. All the seven-year deficiencies are documented since publications of the reports from 2004 to 2012.

Of the 37 reports, 19 (51 per cent) were issued relating to audits conducted by the Big Four. Out of these 19 reports, 10 (53 per cent) contain inspection criticism. These include audit quality and common recurring audit deficiencies.

This paper is based solely on those inspection reports published by the PCAOB.

The findings have significant implications to audit firms and the audit profession on improving audit quality, firms’ internal control and reports.

No known prior research paper is available on the ramifications of the PCAOB’s inspection reports relating to BRIC.

In 2001, the US moved to regulate internal control reporting by management and auditors. While some jurisdictions have followed the lead of the US, many others have not. An important question, therefore, is the relevance of internal control to stakeholders. The more specific issue of the benefits of US-style regulation of internal control reporting is also topical. We review studies on the determinants of internal control quality and its economic consequences for stakeholders including investors, creditors, managers, auditors and financial analysts. We extend previous reviews by focusing on US studies published since 2013 as well as all non-US studies investigating IC quality including countries regulating IC disclosure as well as unregulated settings and both developed and developing economies. In doing so, we identify research questions where evidence remains mixed and new directions in which there are research opportunities.

Three main insights arise from our analysis. First, evidence on the economic consequences of internal control quality suggests that the quality of internal control can have a significant effect on decision making by users of financial information. Second, the results of research on the empirical association between ownership structure, certain board characteristics and internal control quality is generally mixed. Empirical evidence concerning the association between audit committee characteristics and internal control quality generally supports a positive and significant association. Finally, while studies in non-US jurisdictions are increasing, opportunities remain to explore the determinants and consequences of internal control in other jurisdictions. Our review provides evidence for policy makers of whether there are benefits from requiring management and auditors to report on internal control over financial reporting.

This study reviews the existing literature on the U.S. peer review system and the Public Company Accounting Oversight Board (PCAOB) inspection system to assess our knowledge of audit regulation. The traditional self-regulatory system of the accounting profession came to an end, in 2002, when the PCAOB was established to oversee the audit firms of publicly traded companies. This paper contributes to the controversial debate about self-regulation versus independent regulation by analyzing, categorizing, and comparing the research findings on the peer review system and the PCAOB system along three dimensions: the validity of peer reviews and PCAOB inspections, the recognition of reviews and inspections by decision-makers (e.g., investors, bankers, committees), and the effect of reviews and inspections on audit quality. Synthesizing the research on the regulatory regimes suggests that the notion of external quality control, both through peer reviews and government inspections, is positively linked with an improvement of audit quality. At the same time, the analysis indicates that external users do not seem to recognise peer review and PCAOB reports as very useful instruments for decision-making, which is in line with an identified rather skeptical perception of the audit profession on reviews and inspections. Overall, this study reveals that although the academic literature on peer review and PCAOB inspection is extensive it has not produced definitive conclusions concerning various aspects of audit regulation. This paper shows how this blurred picture is due to conflicting research findings, the dominance of the quantitative research paradigm, and unchallenged assumptions within the literature, and concludes by proposing research opportunities for the future.