Is CPAB Captured? A comparison of CPAB and joint CPAB-PCAOB inspection deficiencies

• In Event: Audit Committees

Abstract

This paper evaluates the effectiveness of Canadian Public Accountability Board (CPAB), the independent Canadian audit regulator charged with improving audit quality in Canada. I take advantage of a unique setting where a subset of Canadian auditors’ work is subject to joint inspection by CPAB and the U.S. Public Company Accounting Oversight Board (PCAOB), and draw on regulatory capture theory (Dal Bó 2006; Stigler 1971) to develop ex ante expectations for CPAB’s inspection finding patterns. Based on hand collected data from published inspection reports by CPAB and by PCAOB, my archival qualitative analyses show that, consistent with a regulator captured by the interest of large regulatees, CPAB reports a significantly lower deficiency rate than PCAOB for the same Canadian Big 4 accounting firms inspected, and reports fewer areas of deficiency than PCAOB for these firms. I also find that, consistent with a captured regulator that exhibits “minimal squawk” but nothing more, CPAB’s deficiency rate is indistinguishable from PCAOB’s for non-Big 4 firms. Combined with CPAB’s lack of transparency and consistency in its public disclosure, my results suggest that CPAB is likely captured by the interests of its regulatees, and question the value of the independent regulator.

Author

• Yi Luo, Queen's University - Kingston