Audit quality following the Public Company Accounting Oversight Board’s operation

The purpose of this paper is to investigate the extent to which the transition from self-regulation to heteronomy has changed the gap in audit quality between Big Four and non-Big Four auditors.

This study analyzes publicly held companies in the USA between 1999 and 2012 using univariate analysis, multivariate analysis and quantile regression analysis. Audit quality is measured with discretionary accruals.

This study shows an insignificant difference in audit quality between the clients of Big Four and non-Big Four auditors after Public Company Accounting Oversight Board (hereafter, PCAOB) began its operations. In the analysis of the effects of PCAOB inspections on the audit quality of audit firms that are inspected annually and triennially, the findings show that the inspections have more positive effects when carried out annually. This suggests that the frequency of inspection is positively associated with audit quality. Overall, these results provide evidence that recent improvements in audit quality have been caused by changes in regulatory standards.

The paper provides three major original contributions. First, the authors add to the literature on audit quality by further demonstrating a reduced gap in audit quality between Big Four and non-Big Four audit firms due to heteronomy. Secondly, this study contributes to the debate as to whether independent inspections on audit firms are beneficial or not and suggests that the PCAOB inspections help increase audit quality. Finally, the results of this work contribute to the growing literature examining discretionary accruals.