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The Association between PCAOB-Identified Audit Deficiencies and Small Audit Firms’ Characteristics: Evidence from PCAOB Inspection Reports

Fri, April 25, 6:00 to 7:30pm, Hilton Salt Lake City Center, TBA

Abstract

This study examines the association between certain audit firm characteristics and the number of PCAOB-identified audit deficiencies. Using a hand-collected sample of PCAOB inspection reports for small audit firms with 100 or less issuer clients from 2007 through 2010, an OLS model is applied, where the number of deficiencies is regressed on a set of audit firm characteristics. Results show that the number of PCAOB-identified audit deficiencies is positively associated with the number of issuer clients, and negatively associated with the number of branch offices, the human capital leverage, and the organization structure as LLP firms. Additional analysis also shows that the PCAOB inspection length is positively associated with the number of deficiencies, the number of branch offices, and the number of issuer clients, but negatively associated with the organization structure as LLC firms. Moreover, the PCAOB inspection lag is positively associated with the number of deficiencies and the number of issuer clients.

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