The association between PCAOB-identified audit deficiencies and small audit firms’ characteristics

Abstract

Purpose – The purpose of this study is to examine the association between certain audit firm characteristics and the number of Public Company Accounting Oversight Board (PCAOB)-identified audit deficiencies. Design/methodology/approach – Using a hand-collected sample of PCAOB inspection reports for small audit firms with 100 or less issuer clients from 2007 through 2010, an ordinary least squares model is applied by regressing the number of deficiencies on a set of audit firm characteristics. Findings – Results show that the number of PCAOB-identified audit deficiencies is positively associated with the number of issuer clients and negatively associated with the number of branch offices, the human capital leverage and the organization structure as Limited Liability Partnership firms. Additional analysis also shows that the PCAOB inspection length is positively associated with the number of deficiencies, the number of branch offices and the number of issuer clients, but negatively associated with the organization structure as limited liability company firms. Moreover, the PCAOB inspection lag is positively associated with the number of deficiencies and the number of issuer clients. Research limitations/implications – Results of this study cannot be generalized beyond public accounting firms with 100 or fewer issuer clients. In addition, there is a possibility that other measurements of firm-level characteristics that impact the number of PCAOB-identified audit deficiencies were not captured in the study. Practical implications – This study explains the association between audit firm characteristics and PCAOB-identified audit deficiencies. Our results caution small audit firms about not having enough professional staff, low human capital leverage and serving too many issuer clients, as those factors may potentially impair audit quality. Originality/value – This study helps to explain the relationship between audit deficiencies and controllable, measurable firm-level characteristics. It is, therefore, differentiated from previous studies, most of which were focused on PCAOB-identified audit deficiencies as measures of audit quality and stakeholder reactions to PCAOB reports.

Public Accounting Firm Reputation and Status Incentives for Employee Benefit Plan Audit Quality

“…Controlling for size as well as known determinants of PCAOB inspection findings (Bills et al 2015), the number of audit partners is included within this model. For similar reasons, both the human capital leverage ratio (ratio of CPAs to partners) and whether the firm performs public company audits is included in the model (Kang et al 2014). Finally, the structure of the public accounting firm as either a sole proprietorship or a single office firm is included to control for less complex firm quality control structures (Kang et al 2014).…”

Pengaruh Beban Kerja, Klien Baru, Dan Ukuran Klien Terhadap Defisiensi Audit

“…Upaya tersebut antara lain dilakukan dengan mengeluarkan Sarbanes Oxley Act (SOX) pada tahun 2002. Salah satu keputusan penting yang tercantum dalam Sarbanes Oxley Act adalah pembentukan Public Company Accounting Oversight Board (PCAOB) yang memiliki tugas utama melakukan pengawasan terhadap auditor dalam rangka mencegah kasus serupa Enron terulang kembali (Kang, Farag, Hurt, & Wyrick, 2014). Pengawasan oleh PCAOB tersebut bertujuan untuk melindungi kepentingan investor dan masyarakat umum dalam penyiapan laporan audit yang informatif, wajar, dan independen oleh auditor (Public Company Accounting Oversight Board, 2006).…”

“…Ukuran klien dilihat dengan menggunakan logaritma natural total aset perusahaan klien sampel dari akuntan publik yang diperiksa oleh PPPK. Pengukuran ini mengacu kepada penelitian Setiawan & Fitriany 2011 Kang et al (2014).…”

Effects of disclosed audit sanctions on audit firm’s market share in Italy and Spain

“…Part II of the report only becomes public if the firm fails to satisfactorily remediate the quality control deficiencies in a 12month period. Several studies investigate Part I of PCAOB inspection reports (Lennox and Pittman, 2010;Daugherty et al, 2011;Gramling et al, 2011;Gunny and Zhang, 2013;Kang et al, 2014), while fewer studies investigate Part II (Ragothaman, 2012;Nagy, 2014;Van Linden and Mazza, 2018). Lennox and Pittman (2010) find that audit clients do not perceive the PCAOB inspection reports as informative and suggest that the reason may be due to PCAOB failure to disclose quality control information in the reports.…”