Effectiveness and Consequences of PCAOB Disciplinary Actions: An Analysis of the Resulting Auditor/Client Dynamic and Audit Quality.

• In Event: PCAOB Inspections

Abstract

While several aspects of the PCAOB and SOX have been researched extensively, there has been relatively little research on the effectiveness of the PCAOB enforcement process and its consequences in the audit market. We examine the extent to which different types of PCAOB enforcement actions affect audit fees, auditor retention decisions, and financial reporting quality for auditors subject to the PCAOB disciplinary process and their clients. We find that clients of banned auditors subsequently choose larger audit firms and pay higher audit fees while receiving improved audit quality from their subsequent auditors. We further find that clients of censured auditors are penalized when staying with the censured audit firm by an increase in audit fees after the censure, but do not experience a subsequent increase in audit quality. On the other hand, clients who switch auditors after their previous auditor was censured do not see increased audit fees nor a significant change in the audit quality they subsequently receive. This study should help provide evidence as to the effectiveness and consequences of the PCAOB disciplinary process.

Authors

• Andrew John Imdieke, University of Notre Dame

• Matthew James Beck, Michigan State University

• Chris E Hogan, Michigan State University