Do PCAOB Inspections Improve the Quality of Internal Control Audits?

Mark L. Defond, Clive S. Lennox

Research output: Contribution to journalArticle

  • 12 Citations

Abstract

We investigate whether Public Company Accounting Oversight Board (PCAOB) inspections affect the quality of internal control audits. Our research design improves on prior studies by exploiting both cross-sectional and time-series variation in the content of PCAOB inspection reports, while also controlling for audit firm and year fixed effects, effectively achieving a difference-in-differences research design. We find that when PCAOB inspectors report higher rates of deficiencies in internal control audits, auditors respond by increasing the issuance of adverse internal control opinions. We also find that auditors issue more adverse internal control opinions to clients with concurrent misstatements, who thus genuinely warrant adverse opinions. We further find that higher inspection deficiency rates lead to higher audit fees, consistent with PCAOB inspections prompting auditors to undertake costly remediation efforts. Taken together, our results are consistent with the PCAOB inspections improving the quality of internal control audits by prompting auditors to remediate deficiencies in their audits of internal controls.

LanguageEnglish
Pages591-627
Number of pages37
JournalJournal of Accounting Research
Volume55
Issue number3
Early online date12 Sep 2016
DOIs
StatusPublished - 22 Mar 2017

Fingerprint

Oversight
Audit
Internal control
Inspection
Auditors
Research design
Remediation
Warrants
Audit fees
Fixed effects
Audit firms
Difference-in-differences

Keywords

  • audit opinions
  • auditing
  • G38
  • internal controls
  • K23
  • M42
  • M48
  • PCAOB
  • regulation
  • SEC
  • SOX

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Do PCAOB Inspections Improve the Quality of Internal Control Audits? / Defond, Mark L.; Lennox, Clive S.

In: Journal of Accounting Research, Vol. 55, No. 3, 22.03.2017, p. 591-627.

Research output: Contribution to journalArticle

@article{8c1c55540a2b4af1a7fcf15b8a17964f,
title = "Do PCAOB Inspections Improve the Quality of Internal Control Audits?",
abstract = "We investigate whether Public Company Accounting Oversight Board (PCAOB) inspections affect the quality of internal control audits. Our research design improves on prior studies by exploiting both cross-sectional and time-series variation in the content of PCAOB inspection reports, while also controlling for audit firm and year fixed effects, effectively achieving a difference-in-differences research design. We find that when PCAOB inspectors report higher rates of deficiencies in internal control audits, auditors respond by increasing the issuance of adverse internal control opinions. We also find that auditors issue more adverse internal control opinions to clients with concurrent misstatements, who thus genuinely warrant adverse opinions. We further find that higher inspection deficiency rates lead to higher audit fees, consistent with PCAOB inspections prompting auditors to undertake costly remediation efforts. Taken together, our results are consistent with the PCAOB inspections improving the quality of internal control audits by prompting auditors to remediate deficiencies in their audits of internal controls.",
keywords = "audit opinions, auditing, G38, internal controls, K23, M42, M48, PCAOB, regulation, SEC, SOX",
author = "Defond, {Mark L.} and Lennox, {Clive S.}",
year = "2017",
month = "3",
day = "22",
doi = "10.1111/1475-679X.12151",
language = "English",
volume = "55",
pages = "591--627",
journal = "Journal of Accounting Research",
issn = "0021-8456",
publisher = "Wiley-Blackwell",
number = "3",

}

TY - JOUR

T1 - Do PCAOB Inspections Improve the Quality of Internal Control Audits?

AU - Defond, Mark L.

AU - Lennox, Clive S.

PY - 2017/3/22

Y1 - 2017/3/22

N2 - We investigate whether Public Company Accounting Oversight Board (PCAOB) inspections affect the quality of internal control audits. Our research design improves on prior studies by exploiting both cross-sectional and time-series variation in the content of PCAOB inspection reports, while also controlling for audit firm and year fixed effects, effectively achieving a difference-in-differences research design. We find that when PCAOB inspectors report higher rates of deficiencies in internal control audits, auditors respond by increasing the issuance of adverse internal control opinions. We also find that auditors issue more adverse internal control opinions to clients with concurrent misstatements, who thus genuinely warrant adverse opinions. We further find that higher inspection deficiency rates lead to higher audit fees, consistent with PCAOB inspections prompting auditors to undertake costly remediation efforts. Taken together, our results are consistent with the PCAOB inspections improving the quality of internal control audits by prompting auditors to remediate deficiencies in their audits of internal controls.

AB - We investigate whether Public Company Accounting Oversight Board (PCAOB) inspections affect the quality of internal control audits. Our research design improves on prior studies by exploiting both cross-sectional and time-series variation in the content of PCAOB inspection reports, while also controlling for audit firm and year fixed effects, effectively achieving a difference-in-differences research design. We find that when PCAOB inspectors report higher rates of deficiencies in internal control audits, auditors respond by increasing the issuance of adverse internal control opinions. We also find that auditors issue more adverse internal control opinions to clients with concurrent misstatements, who thus genuinely warrant adverse opinions. We further find that higher inspection deficiency rates lead to higher audit fees, consistent with PCAOB inspections prompting auditors to undertake costly remediation efforts. Taken together, our results are consistent with the PCAOB inspections improving the quality of internal control audits by prompting auditors to remediate deficiencies in their audits of internal controls.

KW - audit opinions

KW - auditing

KW - G38

KW - internal controls

KW - K23

KW - M42

KW - M48

KW - PCAOB

KW - regulation

KW - SEC

KW - SOX

UR - http://www.scopus.com/inward/record.url?scp=85016508914&partnerID=8YFLogxK

U2 - 10.1111/1475-679X.12151

DO - 10.1111/1475-679X.12151

M3 - Article

VL - 55

SP - 591

EP - 627

JO - Journal of Accounting Research

T2 - Journal of Accounting Research

JF - Journal of Accounting Research

SN - 0021-8456

IS - 3

ER -