Who Did the Audit? Investor Perceptions and Disclosures of Other Audit Participants in PCAOB Filings

• In Event: Multiple Auditor Engagements

Abstract

We empirically test whether investors value information about other firms participating in the audits of SEC issuers—that is, firms other than the principal audit firm that issues the audit report. A recent proposal by the PCAOB would require disclosure of such information. The PCAOB argues this requirement would increase transparency and provide investors with valuable information about overall audit quality.
We use a matched control sample research design in the study. We examine cumulative abnormal returns (CARs) for issuers that had other auditors participating in their audits as disclosed in registered audit firms’ Form 2 filings with the PCAOB, along with a sample of matching control issuers that were not disclosed as having other participant auditors. Using the filing date of Form 2 as the event date, we find that CARs are significantly negative for the experimental sample, but not for the matched control sample. Results hold in a multivariate model that includes firm-specific control variables.
In an analysis of earnings response coefficients (ERCs), we find that market valuation of earnings surprises declines after revelation that others participated in the audit. Taken together, these results suggest that data contained in PCAOB Form 2 filings related to other participants in the external audit provide new information to the market, and investors behave as if they perceive audits in which others participated as being of lower quality. Our empirical results support the PCAOB’s position that the disclosure of other participants in audits enhances transparency and is of information value to investors.

Authors

• Carol Dee, University of Colorado at Denver

• Ayalew A Lulseged, The University of North Carolina at Greensboro

• Tianming Zhang, Florida State University