PCAOB Inspections of Smaller CPA Firms: Initial Evidence from Inspection Reports

Hermanson, Dana R.; Houston, Richard W.; Rice, John C.

doi:10.2308/acch.2007.21.2.137

Cited by 108 publications

(109 citation statements)

References 4 publications

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“…A similar trend can be identified for the PCAOB inspections as the number of identified deficiencies decreased for triennially (Anantharaman, 2012;Hermanson et al, 2007;Landis, Jerris, & Braswell, 2011; and annually inspected firms (Church & Shefchik, 2012). In addition, the percentage of firms with quality control problems decreased , while the number of clean inspection reports increased Offermanns & Peek, 2011).…”

Section: Opening the Black Box Through Methodological Pluralismsupporting

confidence: 71%

“…Studies on the PCAOB regime use different approaches to categorize PCAOB reports into "good" and "bad". While several studies consider all identified deficiencies to be of economically equivalent importance and classify the reports according to the number of deficiencies (Hermanson, Houston, & Rice, 2007;Lennox & Pittman, 2010;Offermanns & Peek, 2011) or the rate of deficiencies , other studies distinguish between the kind of deficiency or between the degree of severity of the inspected deficiencies Robertson & Houston, 2010).…”

Section: Recognition Of Pcaob Inspections For Decision-makingmentioning

confidence: 99%

“…While it is known that triennially inspected firms (firms with less than 100 clients) that have received deficiency reports have a higher ratio of clients to personnel and relatively small personal resources (Hermanson & Houston, 2008;Hermanson et al, 2007), less industry expertise (Gunny, Krishnan, & Zhang, 2007), and clients with low earnings quality , insights about annually inspected firms is limited. The fact that 95 percent of triennially inspected audit firms have fewer than ten clients (DeFond & Lennox, 2011, p. 25) makes the mismatch between relevance and research findings even more evident.…”

Section: Focusing On the Real Causes For The Regulatory Shift: Audit mentioning

confidence: 99%

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

Löhlein

2016

Journal of Accounting Literature

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This study reviews the existing literature on the U.S. peer review system and the Public Company Accounting Oversight Board (PCAOB) inspection system to assess our knowledge of audit regulation. The traditional self-regulatory system of the accounting profession came to an end, in 2002, when the PCAOB was established to oversee the audit firms of publicly traded companies. This paper contributes to the controversial debate about self-regulation versus independent regulation by analyzing, categorizing, and comparing the research findings on the peer review system and the PCAOB system along three dimensions: the validity of peer reviews and PCAOB inspections, the recognition of reviews and inspections by decision-makers (e.g. investors, bankers, committees), and the effect of reviews and inspections on audit quality. Synthesizing the research on the regulatory regimes suggests that the notion of external quality control, both through peer reviews and government inspections, is positively linked with an improvement of audit quality. At the same time, the analysis indicates that external users do not seem to recognise peer review and PCAOB reports as very useful instruments for decision-making, which is in line with an identified rather skeptical perception of the audit profession on reviews and inspections. Overall, this study reveals that although the academic literature on peer review and PCAOB inspection is extensive it has not produced definitive conclusions concerning various aspects of audit regulation. This paper shows how this blurred picture is due to conflicting research findings, the dominance of the quantitative research paradigm, and unchallenged assumptions within the literature, and concludes by proposing research opportunities for the future.

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Section: Opening the Black Box Through Methodological Pluralismsupporting

confidence: 71%

Section: Recognition Of Pcaob Inspections For Decision-makingmentioning

confidence: 99%

Section: Focusing On the Real Causes For The Regulatory Shift: Audit mentioning

confidence: 99%

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

Löhlein

2016

Journal of Accounting Literature

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“…Prior work investigates differences in audit quality across firms whose auditors are subject to PCAOB inspections (or not) using variation in inspections of non-U.S. auditors (e.g., Lamoreaux, 2013;Fung et al, 2014;Krishnan et al, 2014;Shroff, 2015) as well as the effects of inspection reports (including their content such as unfavorable findings) on equity prices, audit quality, and client responses (e.g., Hermanson et al 2007;Lennox and Pittman, 2010;DeFond and Lennox, 2011;Gramling et al, 2011;Offermanns and Peek, 2011;Abbott et al, 2013;Gunny and Zhang, 2013;Boone et al, 2014;Acito et al, 2016;DeFond and Lennox, 2016). In addition, there is evidence on market reactions and client responses to PCAOB sanctions against Deloitte & Touche in 2007(e.g., Dee et al, 2011Boone et al, 2014).…”

mentioning

confidence: 99%

Public Audit Oversight and Reporting Credibility: Evidence from the PCAOB Inspection Regime

Gipper

Leuz

Maffett

2015

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This paper examines how audit oversight by a public-sector regulator affects investors' assessments of reporting credibility. We analyze whether market responses to unexpected earnings releases increase following the introduction of the Public Company Accounting Oversight Board (PCAOB), as predicted by theory if the new regime enhances reporting credibility. To identify the effects, we use a difference-in-differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal year-ends, auditors, and the timing of PCAOB inspections. We find that market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms' 10-K filings after the new regime is in place. Overall, our results are consistent with public audit oversight increasing the credibility of financial reporting. Brandon Gipper IntroductionAs the accounting scandals in the early 2000s illustrated, reliable financial reporting is a cornerstone of trust in the stock market, which in turn plays a key role for investor participation (Guiso et al., 2008). In an effort to restore trust in financial reporting after the scandals, the U.S.Congress passed the Sarbanes-Oxley Act (hereafter, "SOX"). One of its core provisions was the creation of the Public Company Accounting Oversight Board (hereafter, the "PCAOB") and the requirement that the PCAOB inspect all audit firms (hereafter, "auditors") of SEC-registered public companies (hereafter, "firms" or "issuers"). The introduction of the PCAOB represents a major regime shift in auditing, replacing self-regulation with public oversight. For these reasons, the effect of the new PCAOB regime on reporting credibility is not obvious. Another complication is that investors should respond negatively to restatements or the revelation of deficiencies in the audits of particular engagements or particular auditors. It is only if these outcomes indicate improvements in audit quality going forward, spilling over to other engagements and auditors and hence leading to broader improvements in audit quality, that we expect reporting credibility to increase. In this regard, it helps that the PCAOB does not reveal which audit engagements were inspected, but produces a number of publicly observable outcomes, notably auditor-level inspection reports, which allow investors to form updated assessments of the PCAOB regime. Similarly, investors can potentially draw inferences about the new regime from observed changes in corporate reporting (such as restatements).The hypothesized mechanism for a link between public audit oversight and reporting credibility is that PCAOB inspections identify meaningful deficiencies in the way audits are conducted, leading to subsequent improvements in auditing procedures that extend beyond a single engagement. Investors learn about these broader changes and adjust th...

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“…Roybark (2006) compares triennial firm and annual firm inspection reports issued by the PCAOB in 2005 and documents the types of deficiencies found on the inspection reports, but does tabulate the Since 2006, the PCAOB has begun publicly criticizing auditors for conducting too much work rather than not enough work (Palmrose 2006;Glover et al 2009), and so the reports analyzed by Roybark (2006) and Hermanson et al (2007) may reflect different areas of deficiencies than newer reports as a consequence of this shift in philosophy. This study examines all PCAOB inspections reports issued between 2005 and 2008.…”

Section: Introductionmentioning

confidence: 99%