PCAOB Inspection Reports and Audit Quality

Chunqi (Tracey) ZHANG, Singapore Management University
Katherine Gunny


Creation of the PCAOB under SOX overhauled the regulation framework for the accounting profession by replacing self-regulation with independent regulation. The stated goal of the PCAOB is to improve audit quality. Therefore, in an effort to understand the effectiveness of PCAOB inspections, we examine whether PCAOB inspection results are objective and fair (i.e. able to distinguish high and low quality auditors). Second, to shed light on the rationale behind regulators’ decision to discontinue the accounting industry’s reliance on self-regulation, we investigate whether peer review opinions are able to distinguish audit quality. Using multiple measures of audit quality (abnormal current accruals, probability of restatement, propensity to just meet analyst forecasts, and propensity to issue a going concern opinion), we find evidence that PCAOB reports are able to discriminate audit quality and no evidence for peer review opinions. Our study sheds light on the effectiveness of the PCAOB and the rationale behind the regulatory reform.