PCAOB Quality Control Inspection Reports and Changes in Market Share: A Re-Examination of Prior Evidence

• In Event: Benefits and Unintended Consequences of Auditor Inspections

Abstract

Part II of the Public Company Accounting Oversight Board (PCAOB) inspection report is released only when firms fail to remediate quality control criticisms. Nagy (2014) suggests that audit clients view the public release of Part II as a credible signal of audit quality, as evidenced by a subsequent loss of market share (i.e., client dismissals and a decrease in new engagements for audit firms that had Part II released). When re-examining Nagy’s results, firms that exit the public company audit market (i.e., withdraw their registration with the PCAOB) are less likely to satisfactorily remediate their quality control criticisms. After controlling for audit firm withdrawals with a fixed effects model, we find no evidence that the market reacts to information contained in Part II of the inspection report. Thus, while Part II may be a signal of audit quality, it does not appear that audit clients react to the signal. Our findings stress the importance of controlling for self-selection when examining auditor changes. Also, we posit that the PCAOB inspection process may have unintended consequences by creating a more favorable option for audit firms to exit the public company audit market instead of improving audit quality.

Authors

• William L Buslepp, Louisiana State University

• Lisa M Victoravich, University of Denver

• Jared DeLisle, washington state university - vancouver