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The purpose of this study is to examine the association between certain audit firm characteristics and the number of Public Company Accounting Oversight Board (PCAOB)-identified audit deficiencies.

Using a hand-collected sample of PCAOB inspection reports for small audit firms with 100 or less issuer clients from 2007 through 2010, an ordinary least squares model is applied by regressing the number of deficiencies on a set of audit firm characteristics.

Results show that the number of PCAOB-identified audit deficiencies is positively associated with the number of issuer clients and negatively associated with the number of branch offices, the human capital leverage and the organization structure as Limited Liability Partnership firms. Additional analysis also shows that the PCAOB inspection length is positively associated with the number of deficiencies, the number of branch offices and the number of issuer clients, but negatively associated with the organization structure as limited liability company firms. Moreover, the PCAOB inspection lag is positively associated with the number of deficiencies and the number of issuer clients.

Results of this study cannot be generalized beyond public accounting firms with 100 or fewer issuer clients. In addition, there is a possibility that other measurements of firm-level characteristics that impact the number of PCAOB-identified audit deficiencies were not captured in the study.

This study explains the association between audit firm characteristics and PCAOB-identified audit deficiencies. Our results caution small audit firms about not having enough professional staff, low human capital leverage and serving too many issuer clients, as those factors may potentially impair audit quality.

This study helps to explain the relationship between audit deficiencies and controllable, measurable firm-level characteristics. It is, therefore, differentiated from previous studies, most of which were focused on PCAOB-identified audit deficiencies as measures of audit quality and stakeholder reactions to PCAOB reports.

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.

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.

The accelerated pace of change in the global economy and capital markets along with the complexity of transactions and financial reporting that involve applying fair value measurements (FVM) is a major third-party user concern. The 2008 financial crisis highlighted risks that investors are exposed to when making FVM-related capital allocations. Accounting estimates often involve subjective assumptions and measurement uncertainty, increasing potential management bias (Choudhary, 2011; Ramanna & Watts, 2012). FVMs are of critical importance to the reliability of the financial statements. Therefore, the purpose of this chapter is to inform educators of the possible need to evaluate their curriculum as to coverage of FVM topics. The support for this evaluation is based on our attempt to: (1) evaluate the extent of reported FVM-related deficiencies with reference to regulatory bodies’ findings of significant deficiencies in FVM; (2) examine the use of FVM specialists; (3) determine if colleges and universities are keeping pace with FVM demands; (4) list the Uniform CPA Examination Blueprint FVM testing areas; and (5) provide curricular FVM topic recommendations.

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.

The purpose of this study is to examine the impact of workloads at public accounting firms on the likelihood of an audit deficiency being identified during a triennial inspection by the Public Company Accounting Oversight Board (PCAOB).

Using the human resource information disclosed in PCAOB inspection reports, this study constructs two firm-specific workload measures: the ratio of issuer clients to audit partners; and the ratio of issuer clients to professional staff. Firm-level audit deficiency is measured at three levels of severity: Do any of the audit engagements inspected by the PCAOB reveal an audit deficiency? Are any of the identified audit deficiencies directly related to the auditors’ failure to identify a departure from GAAP in the client’s financial statement? Are any of the identified audit deficiencies associated with a significant adjustment or restatement in the client’s subsequent period financial statements? This study uses logistic regression to examine the association between audit deficiency and the workload of public accounting firms.

The empirical evidence suggests that the workload of public accounting firms is positively associated with the likelihood of a deficient audit, auditor’s failure to identify client’s GAAP departure and/or an audit deficiency resulting in a significant adjustment or even a restatement of the client’s financial statements in the subsequent period.

This study is among the first to investigate the impact of firm workload on deficient audits.

The purpose of this paper is to examine the effect of the PCAOB part II report disclosures on US triennially inspected audit firms’ deregistration decisions, the likelihood and the timing of audit firms’ dismissals and resignations.

The paper anchored on US regulations used 158 publicly available records of disclosed PCAOB part II reports from 2004 to 2012.

The number of the quality control deficiencies disclosed in the part II report affects US triennially inspected audit firms’ decisions to deregister from the PCAOB. Additionally, audit firms’ dismissals and resignations, both occur mostly within the first year after the part II report disclosure, although audit firms that subsequently deregister are more likely to be dismissed.

The paper provides support that the disclosure of the PCAOB part II inspection report motivates audit quality improvement.

The PCAOB inspection and subsequent disclosure of the part II inspection report enhances audit quality, which in turn, enhances investor confidence in the accuracy and reliability of audited financial statements.

The paper provides insights about the effect of the disclosures of PCAOB part II report, over and above any benefits from the PCAOB part I report disclosures, which is the dominant focus of related literature.

The purpose of this study is to examine the cost of the introduction of independent audit inspections in New Zealand.

The research is conducted using audit fee data from New Zealand and examines the overall impact of the reforms on the cost imposed on auditees.

The findings show that there was no general increase in audit fees but a significant increase in audit fees for small listed companies compared to audit fees for unlisted companies and large listed companies.

The practical implications of this study suggest that the introduction of independent inspections led to increased costs for some clients, particularly smaller listed companies, and that audit firms were able to pass on these costs to their clients. These results have important implications for policymakers and auditors alike.

This study provides new insights into the cost of the introduction of independent audit inspections, which have been the subject of ongoing criticisms and recommendations for improvement.

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.

The purpose of this paper is to examine whether a negative outcome (i.e. a sanction) of an inspection by Korea’s Financial Supervisory Service for an industry-leading company affects the accounting quality of other companies in the same industry. The premise is that when peer companies observe the negative results of such an inspection on a leader in their industry, they will be more concerned about their own risk during a future inspection and more likely to increase their accounting quality.

The authors conduct a mutivariate Oridnary Least Squares (OLS) regression using 11,476 South Korean samples from 2002 to 2016. The study uses ordinary least square regressions to test the hypotheses using discretionary accruals as a proxy for accounting quality.

The authors find that peer companies reduced their discretionary accruals in the next period and that this reduction is amplified according to the severity of the disciplinary action on the industry leader and the materiality of errors in that leader’s financial statements.

This finding contributes to the literature by providing the first evidence of a spillover effect of regulatory inspection on accounting quality that financial reporting sanctions not only affect the overall accounting quality of the sanctioned company but also that of its peers in the same industry. The authors expect this study to lead to future research on the effect of other regulations on industry-wide accounting quality.