The Validity of Publicly Available Measures of Audit Quality. Evidence from the PCAOB Inspection Data

• In Event: Impact of Regulators

Abstract

This study investigates the ability of several commonly used measures of audit quality derived from publicly available data to predict an accurate measure of audit process quality derived from audit deficiencies of individual engagements (Part I Findings) identified during the PCAOB inspections process. Using a unique dataset of inspected engagements, I find that several measures of audit quality used in prior literature are predictive of audit deficiencies, consistent with these measures conveying audit quality. However, I also find that going concern opinions positively predict Part I Findings, consistent with a disclaimer effect and not with an argument of higher audit quality used in prior literature. I also find that the collective predictive power of publicly available measures of audit quality on Part I Findings is low, perhaps because most measures are a joint function of financial reporting and audit process quality. Overall, these results provide some guidance to researchers about which measures of audit quality to use and suggest that some results in prior literature may need to be interpreted with caution.

Author

• Daniel Aobdia, Northwestern University