Does PCAOB Inspection Exposure Affect Auditor Reporting Decisions?

Abstract

To gain insight into the Public Company Accounting Oversight Board's (PCAOB) impact on audit quality, this study investigates the association between PCAOB inspection exposure (akin to the threat of a PCAOB inspection) and auditor reporting decisions. Certain foreign governments prohibit PCAOB inspections of their domestic auditors of U.S. SEC registrants citing sovereign control. This unique setting provides an opportunity to observe variation in the reach of the PCAOB inspection program and isolate its' effect on auditor reporting. I find that auditors in jurisdictions allowing PCAOB inspections are more likely to report going concern opinions and material weaknesses relative to auditors in jurisdictions barring PCAOB inspections. I find no difference in these auditor reporting propensities in the pre-PCAOB regulatory. This study provides evidence that PCAOB inspection exposure is associated with auditor reporting incentives, and ultimately audit quality, which is the fundamental purpose of the PCAOB inspection program.