*PCAOB International Inspection and Audit Quality

• In Event: International Auditing

Abstract

The Public Company Accounting Oversight Board (PCAOB) commenced inspections of foreign accounting firms in 2005. An important policy concern is that several countries have refused to allow the PCAOB to conduct inspections of their accounting firms. We investigate (1) whether audit quality improves in the post inspection period for clients of inspected foreign auditors, and (2) whether audit quality is higher for client firms whose foreign auditors have been inspected by the PCAOB, compared to client firms of foreign auditors whose governments have refused inspections by the PCAOB. We use abnormal accruals, proxies for earnings smoothing, and value relevance of accounting numbers as proxies for audit quality. Our results provide some evidence consistent with the PCAOB’s claim that the clients of foreign audit firms that have undergone PCAOB inspections have benefited from the inspections.

Authors

• Jagannathan Krishnan, Temple University

• Jayanthi Krishnan, Temple University

• Hakjoon Song, The University of Akron