Do PCAOB Inspections Improve the Quality of Internal Control Audits?

Mark L. Defond, Clive S. Lennox

Research output: Contribution to journalArticle

44 Citations (Scopus)
230 Downloads (Pure)

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.

Original languageEnglish
Pages (from-to)591-627
Number of pages37
JournalJournal of Accounting Research
Volume55
Issue number3
Early online date12 Sep 2016
DOIs
Publication statusPublished - 1 Jun 2017

Keywords

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

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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