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Does Part II of the PCAOB inspection report provide new information to the market? A re-examination of prior evidence

William Buslepp (Department of Accounting, Louisiana State University, Baton Rouge, Louisiana, USA)
R. Jared DeLisle (Department of Finance, Utah State University, Logan, Utah, USA)
Lisa Victoravich (School of Accountancy, University of Denver, Denver, Colorado, USA)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 30 October 2018

Issue publication date: 27 November 2018

313

Abstract

Purpose

Part II of the Public Company Accounting Oversight Board (PCAOB) inspection report is released only when firms fail to remediate quality control criticisms and is intended to be a public signal of audit quality. The purpose of this paper is to reexamine whether audit clients react to the release of Part II of the PCAOB inspection report as a signal of audit quality.

Design/methodology/approach

This study uses a difference-in-difference regression model to examine the association between the release of Part II of the PCAOB inspection report and an audit firm’s change in market share. A sensitivity analysis is also performed to determine whether the main findings are robust to the timing of the release of the report and type of quality control criticism included in Part II of the inspection report.

Findings

After controlling for the prior year’s changes in market share, the authors find no evidence that clients react to the public release of Part II of the report. In the second part of the study, they examine when clients become aware of the contents of the Part II report prior to its release. Firms with audit performance criticisms experience a decrease in market share following the release of Part I. Firms with firm management criticisms experience a significant decrease in market share following the remediation period and before the public release of Part II.

Practical implications

The results suggest that Part II of the PCAOB inspection report does not provide new information to the market. Clients appear to be aware of the information contained in Part II of the PCAOB inspection report prior to its release. The authors believe that the delay in releasing the Part II report may create an information imbalance, and the PCAOB may want to consider ways to improve the timeliness of the information.

Originality/value

This study questions the generalizability of prior research which finds that Part II of the inspection report provides new information that is valued by the public company audit market as a signal of audit quality. The findings provide new evidence that the contents of Part II and the firm’s ability to remediate the quality control concerns are known to audit clients prior to the public release.

Keywords

Acknowledgements

The authors thank Ryan Casey, Riza Cruz, Adam Greiner, Ken Reichelt, Michael J Mowchan and Albert Nagy, three anonymous reviewers and the participants of the 2017 AAA Auditing Mid-Year meeting and the 2016 AAA Annual meeting for their helpful comments.

Citation

Buslepp, W., Jared DeLisle, R. and Victoravich, L. (2018), "Does Part II of the PCAOB inspection report provide new information to the market? A re-examination of prior evidence", Managerial Auditing Journal, Vol. 33 No. 8/9, pp. 715-735. https://doi.org/10.1108/MAJ-10-2017-1666

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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