PCAOB Quality Control Inspection Reports and Auditor Reputation

• In Event: Auditing I

Abstract

In 2002, the peer review auditor program was replaced with independent inspections of audit firms by the Public Company Accounting Oversight Board (PCAOB). After each inspection, the PCAOB issues inspection reports that include a public portion (Part I) of identified audit deficiencies, and most include a nonpublic portion (Part II) of identified quality control weaknesses. Part II of the report only becomes public if the firm fails to satisfactorily remediate the quality control deficiencies in a 12 month period. This study examines the effect that the public disclosure of the quality control criticisms (i.e., those that have not been satisfactorily remediated within 12 months) has on auditor reputation. The results suggest that publicly disclosed quality control criticisms provide a credible signal of auditor quality to audit clients.

Author

• Albert L. Nagy, John Carroll University