The PCAOB Revolving Door and Audit Quality

• In Event: PCAOB Inspection & Regulation

Abstract

The so-called “revolving door” for employees moving between the Public Company Accounting Oversight Board (PCAOB) and the accounting firms it regulates has received heightened scrutiny in recent years. Using an online professional networking platform to identify former PCAOB employees hired by large, annually inspected audit firms and a sample of these auditors’ clients from 2010 to 2016, we explore the association between PCAOB-to-accounting firm personnel movements and audit quality. We find that audit fees and, for firms at a high risk of misstatement, audit lags are positively associated with the number of former PCAOB personnel employed by the auditor. Additionally, restatements due to material errors in prior period financials (i.e. “Big R” restatements) and, for firms at a high risk of misstatement, abnormal accruals are negatively associated with the number of these revolving door employees. These results suggest that the presence of former PCAOB employees are beneficial on balance to firms’ initiatives to improve audit quality particularly for clients most at risk of material misstatement.

Authors

• Jagan Krishnan, Temple University

• Jayanthi Krishnan, Temple University

• Steven Maex, Temple University