PCAOB International Inspections, Audit Profession Development, and Audit Quality
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Using the setting where auditors of foreign companies cross-listed on U.S. stock exchanges are subject to Public Company Accounting Oversight Board (PCAOB) inspection after July 19, 2004, I examine the impact of PCAOB international inspections and audit profession development (APD) on audit quality. I hypothesize and find that PCAOB inspection access in a country is associated with a decrease in total accruals. In countries with higher levels of APD, the first PCAOB inspections conducted in a country are associated with an incremental decrease in total and abnormal accruals. In countries with lower levels of APD, total and abnormal accruals are incrementally smaller (less income-increasing) for the firms that have been inspected relative to the firms that are not inspected, consistent with my prediction. The results of the going concern analysis indicate that for distressed companies in countries with low APD, the propensity to issue a going concern opinion is significantly higher after PCAOB inspection access is granted. Contrary to my prediction, however, the propensity to issue a going concern opinion is incrementally lower for the firms that have been inspected relative to the firms that are not inspected, in low APD countries. However, overall, the propensity to issue a going concern opinion is higher after PCAOB inspection access, the commencement of PCAOB inspections in a country, and being the inspected audit firm, as compared to the pre-PCAOB inspection access period, for distressed companies in countries with low APD. The international inspection issue has received much regulatory attention. The PCAOB has claimed that U.S. investors “are deprived of the potential benefits of PCAOB inspections” of the auditors in jurisdictions where PCAOB inspections are not permitted (PCAOB, 2011b). The findings in my study provide some evidence that PCAOB international inspections are associated with one of these potential benefits, increased audit quality.
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