Does the PCAOB International Inspection Access Affect Voluntary Disclosure? Evidence from Management Forecast Accuracy

• In Event: PCAOB Inspection & Regulation

Abstract

We investigate changes in management forecast accuracy around the Public Company Accounting Oversight Board’s (PCAOB) initial access to inspect auditors of U.S.-listed foreign firms. We expect that inspection access increases auditors’ scrutiny of their clients’ financial reports and thereby improves the underlying information used by managers to make forecasts. Using a difference-in-differences framework, we document that managers issue more accurate earnings forecasts following PCAOB inspection access. We also find that the improvement in forecast accuracy is more pronounced for firms whose reported earnings appear to have been affected most by inspection access (i.e., those with reduced abnormal accruals). Using a plausibly exogenous shock to auditors’ commitment to high-quality audits elicited by PCAOB regulatory oversight, our study identifies changes in auditors’ incentive as a primary driver of managers’ improved decision making.

Authors

• Lijun Lei, University of North Carolina-Greensboro

• Sydney Qing Shu, Miami University

• Wayne B. Thomas, University of Oklahoma