Are All PCAOB Inspection Deficiencies Created Equal?

• In Event: PCAOB Inspection & Regulation

Abstract

We investigate whether a shift in the PCAOB’s focus towards identifying deficiencies in auditors’ internal control assessments affected the informativeness of Big 4 firms’ inspection reports. We find that while total PCAOB-identified audit deficiencies are initially positively associated with client misstatement likelihood, they are negatively associated with client misstatement likelihood after the shift in focus in 2010. Further, we find that control-related audit deficiencies are negatively associated with misstatement likelihood both before and after 2010. Additional testing indicates the PCAOB’s risk-based selection process likely drives the observed negative relation between control-related audit deficiencies and misstatement likelihood, but we continue to find evidence that control-related audit deficiencies are less indicative of poor audit quality than other audit deficiencies. Our results have implications for understanding the informativeness of inspection reports and are particularly timely given that the PCAOB is currently considering changes to its inspection process and reports.

Authors

• Andrew A Acito, Virginia Tech

• James Joseph Anderson, Michigan State University

• Matthew Beck, University of Kansas