Spillover Mechanisms of International PCAOB Inspections for Audit Quality in Non-US Jurisdictions and the Role of the Domestic Independent Inspection Regime

• In Event: Impact of PCAOB Inspections on the audit process and/or standard-setting

Abstract

This paper investigates whether remediation of the internal quality control system of audit firms in non-US jurisdictions where the PCAOB has detected internal control deficiencies is a spillover mechanism that explains the documented change in audit quality of non-cross-listed clients due to the international PCAOB inspection program. We also assess if the presence of a local inspection regime mediates this relation. Our sample consists of first-time international PCAOB inspections of Big4 audit firms in 18 countries during the period 2006-2011. Our findings indicate that remediation of internal quality control criticism raised by the PCAOB for audit firms in non-US jurisdictions is associated with earnings quality of non-cross-listed audit clients for client-year observations in jurisdictions where there was not a domestic independent inspection regime in place. We also find that the presence of a domestic inspection regime influences the relation between international PCAOB inspections and earnings quality of non-cross-listed audit clients when no remediation occurs. Finally, our findings also demonstrate an anticipation effect of first-time international PCAOB inspections.

Author

• Christophe Van Linden, Belmont University