The Efficacy of PCAOB Operating Decisions: Evidence from Office Expansion

• In Event: Regulatory Effects

Abstract

The PCAOB’s operating budget and related investment in its inspection program have increased substantially across time. To provide insights into the efficacy of the PCAOB’s decision to increase the resources allocated to its inspection program, we leverage its decision to open five new satellite offices in 2009. Using a difference-in-differences empirical design, we find that audit quality significantly improved following the PCAOB’s expansion for audits in the markets where new offices opened relative to audits in markets without an office. However, we find no evidence that auditors affected by the PCAOB’s expansion passed on costs directly to companies through increased audit prices in those markets. In contrast, we do find evidence of an indirect cost associated with the expansion in the form of a relative increase in auditor turnover in the markets affected by the office openings. In further analyses, we find that the PCAOB’s office expansion resulted in greater scrutiny of auditors that operated in the affected markets and that the improvement in audit quality persists well beyond the period immediately following the office openings, suggesting the observed effects were a product of a real change in PCAOB oversight. Together, our findings suggest that the PCAOB’s additional investment in audit oversight was effective in improving audit quality without imposing a significant direct cost on companies and shareholders.

Authors

• James Justin Blann, University of Arkansas

• Tyler Kleppe, University of Kentucky

• Jonathan Shipman, University of Arkansas-Fayetteville