PCAOB Inspections and the Effect on Audit Pricing

• In Event: Auditing 2

Abstract

We examine the audit fees of 1,827 client firms for which the auditor received a PCAOB inspection for the period 2004 – 2013 and find that contemporaneous PCAOB deficiencies, both GAAS and GAAP, are associated with higher audit fees. These results suggest that either higher audit fees are a result of performing more audit work for past deficiencies or the higher fees are a result of a more complex and high-risk audit engagement as is often considered by the PCAOB when selecting engagements for review. DeFond (2010) argues that it is important to understand the consequences of PCAOB inspections since the inspections and the subsequent outcomes can potentially affect auditors’ incentives to assure high-quality audits which are essential for properly functioning capital markets. Auditor incentives most often associated with audit quality are litigation and reputational concerns (DeFond, 2010), however audit fees may also affect auditor incentives.

Authors

• Laura K. Rickett, Cleveland State University

• Pervaiz Alam, Kent State University - Kent