PCAOB International Inspection Access and Management Forecast Accuracy: Evidence from U.S.-Listed Foreign Firms

• In Event: Regulators

Abstract

We examine the association between the PCAOB’s access to inspect foreign auditors and the accuracy of management forecasts issued by U.S.-listed foreign firms. Theory predicts that higher-quality audits of mandatory disclosures should induce more credible voluntary disclosure. Using a difference-in-differences design, we document that after the PCAOB gains access to inspect foreign auditors, management forecasts become more accurate (i.e., forecast errors decrease). We also document that the relation between PCAOB inspection access and management forecast accuracy is more pronounced for firms that experience a greater reduction in discretionary accruals. This result is consistent with improved audit quality (and thus higher earnings quality) leading to more credible management forecasts after auditors become subject to PCAOB inspections. Overall, our evidence demonstrates a positive externality (i.e., improved quality of voluntary disclosure) arising from the PCAOB’s regulatory oversight of non-U.S. auditors and justifies the benefits of PCAOB inspections abroad.

Authors

• Lijun Lei, University of North Carolina-Greensboro

• Sydney Shu, San Diego State University

• Wayne B. Thomas, University of Oklahoma