PCAOB Inspections of International Audit Firms: Initial Evidence

Abstract

This paper examines PCAOB inspections of international audit firms, based on an analysis of 175 first‐time and 56 second‐time inspection reports issued through February 4, 2012. We find that just over half of the inspection reports identify audit deficiencies, and two‐thirds cite quality control defects. Deficiency firms are smaller, but have more issuer clients than no‐deficiency firms, reflecting possible over‐extension into the issuer audit market. Affiliates of Big 4 firms are less likely to have deficiencies than are other firms. We find no significant differences in the rate of audit deficiencies or quality control defects based on whether the PCAOB acts alone or cooperates with a local regulator in conducting the inspection, or based on the home country's legal tradition (common law versus other). Audit deficiencies are most often related to substantive testing and the failure to perform sufficient audit procedures. The deficiencies most commonly relate to the balance sheet, while the individual account cited most often is revenues. Unlike prior research that examines US firms, there is no difference in the rate of audit deficiencies or quality control defects for first‐time versus second‐time inspections.

Quality control system criticism raised by the Public Company Accounting Oversight Board in non‐US jurisdictions and earnings quality of non‐cross‐listed clients

“…International PCAOB inspections can take place in regimes where (i) there is no local independent inspection regime in place, (ii) the local inspection regime conducts inspections separately (from the PCAOB), or (iii) the local inspection regime conducts joint inspections with the PCAOB. Prior empirical findings do not provide evidence that differences in these types of foreign inspection regimes are associated with PCAOB‐inspection findings as reported in PCAOB inspection reports (Bishop et al, ; Krishnan et al, ). For example, Bishop et al () found no difference in the effect therein (i.e., between a PCAOB‐only inspection and the PCAOB conducting an inspection jointly with a local regulator) on the probability of receiving a deficient PCAOB inspection report.…”

“…The initial evidence of PCAOB inspection findings in non‐US jurisdictions from 2005 to 2011 indicates that (i) for half of the inspections the PCAOB has identified client‐related deficiencies, and (ii) for two‐thirds of the inspections the PCAOB has identified QCS‐related deficiencies (Bishop, Hermanson, & Houston, ). In almost all cases, the accounting firms in non‐US jurisdictions remediate QCS‐related deficiencies raised by the PCAOB.…”

“…In almost all cases, the accounting firms in non‐US jurisdictions remediate QCS‐related deficiencies raised by the PCAOB. Bishop et al () report only five cases (within a total of 230 international inspections through 2012) that did not involve the remediation of QCS‐related deficiencies; none of those five cases were Big 4 accounting firms. Examples of nonremediated QCS‐related deficiencies herein (i.e., raised by the PCAOB during international inspections of non‐Big 4 accounting firms) include (i) independence policies and procedures (e.g., PCAOB, ), (ii) audit procedures (e.g., PCAOB, , with respect to revenue testing), and (iii) audit documentation (e.g., PCAOB, ).…”

From peer review to PCAOB inspections: Regulating for audit quality in the U.S.

“…Other studies have drawn conclusions on the validity of the results from a comparison of peer review and PCAOB reports about the same firm (Anantharaman, 2012;. Moreover, the analysis of the responses of audit firms to review and inspection outcomes (Bishop, Hermanson, & Houston, 2013;Blankley, Kerr, & Wiggins, 2012;Church & Shefchik, 2012;Wallace & Cravens, 1994), and surveys gauging opinions on peer reviews and inspections Ehlen & Welker, 1996;Newman & Oliverio, 2010), allowed further conclusions about the validity of the systems.…”

An Empirical Analysis of the Global Audit Market: International Financial Reporting Standards-Related Changes and Differences within the Big 4 Global Networks

“…However, published reports by the Public Company Accounting Oversight Board (PCAOB) in the United States (U.S.) raise concerns about the quality of foreign auditors; about half of the inspection reports of international audit firms released through 2012 cite audit deficiencies, while two-thirds report quality control defects (Bishop, Hermanson, and Houston, 2013). Although fewer of these issues arise for clients audited by members of the Big 4 global networks, the PCAOB also faces complications in executing inspections of foreign auditors due to regulatory disagreements between the U.S. and other jurisdictions.…”