Does Audit Quality Affect an Audit Firm’s Decision to Contest PCAOB Inspection Reports?

• In Event: Auditing, Audit Quality, and Materiality

Abstract

This study investigates whether an audit firm’s performance (specifically its audit quality) affects its decision to contest PCAOB inspection deficiency findings. We find evidence that annually inspected audit firms are more likely to contest when audit quality, as proxied by both discretionary accruals and the propensity to issue financial restatements, is relatively lower. We suggest that low-quality audit firms disproportionately fear that inspection deficiency findings will harm their reputation and client retention, and they contest to minimize that harm. Moreover, low-quality audit providers are more likely to contest than are high-quality audit providers because of their more pronounced reputation risks. We find no evidence that triennially inspected audit firms are more likely to contest given relatively higher or lower audit quality. We also examine firms that used strikingly harsher tone in contesting, which we define as severely contesting. However, we find no evidence that audit quality has an incremental impact on either an annually inspected or triennially inspected audit firm’s decision to severely contest. This study contributes to the literature by being the first to examine audit firm contesting behavior. The results contribute to the understanding of audit firm motivations, specifically with respect to the PCAOB inspection process.

Authors

• Alexander Browne, University of Texas at San Antonio

• Dennis M Lopez, University of Texas-San Antonio