Favorable PCAOB Inspections and Auditor Liability

• In Event: Auditor Advice, Skepticism, and Liability

Abstract

We examine the value relevance of PCAOB inspection finding by examining whether they affect jurors’ assessments of auditor liability. Specifically, we investigate whether a clean inspection finding for the audit in question (i.e., the PCAOB did not identify deficiencies for this audit) provides litigation protection for auditors, and whether factors related to the PCAOB, audit firm, plaintiff attorney, and client reduce any such litigation protection. Drawing on source credibility theory, we predict and find that a favorable, engagement-specific PCAOB inspection finding reduces jurors’ negligence assessments, and that this effect is mediated by the credibility of the auditor’s defense argument. We also find that having a former PCAOB inspector on the audit in question reduces the litigation protection of a clean inspection finding only if the plaintiff attorney criticizes this staffing decision. Furthermore, holding the presence of a favorable, engagement-specific PCAOB inspection finding constant, an unfavorable, firm-wide PCAOB quality control criticism increases jurors’ negligence assessments but the presence of an audit firm alumni at the client does not. Collectively, our results indicate that PCAOB inspection reports could be informative in the juror setting, but the benefit of favorable, engagement-specific PCAOB inspection findings can be diminished. In addition, our findings about the potential benefit of favorable inspection findings on juror judgments complements prior research indicating that negative information from the PCAOB is associated with investor and client decisions.

Authors

• Jonathan H Grenier, Miami University

• Jesse C Robertson, University of North Texas

• Chad Allan Simon, Utah State University

• Jeremy Vinson, Clemson University