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PCAOB Inspections and the Differential Audit Quality Effect for Big 4 and Non–Big 4 US Auditors

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  • Inder K. Khurana
  • Nathan G. Lundstrom
  • K. K. Raman

Abstract

In this study, we investigate whether the increase in regulatory scrutiny epitomized by the initial PCAOB inspection impacted audit quality differentially for Big 4 and non–Big 4 auditors to better understand the consequences of PCAOB inspections for different audit firm types. Because of competing views on the effect of PCAOB inspections, the relation between PCAOB inspections and the audit quality differential between Big 4 and other auditors is an empirical issue. Empirically, we take the endogenous choice of auditor as a given and utilize a difference‐in‐differences specification that takes into account the staggered timing of the initial PCAOB inspection for different‐sized auditors in the United States. Our results suggest that the initial PCAOB inspection improved audit quality more for Big 4 auditors than for other annually inspected or triennially inspected non–Big 4 auditors. We also examine annually and triennially inspected non–Big 4 auditors separately, and find that the pre‐post Big 4/non–Big 4 differential audit quality effect is more pronounced for the triennially inspected non–Big 4 firms. In the larger context of the highly concentrated US audit market, our findings that PCAOB inspections accentuate the Big 4/non–Big 4 audit quality differential are of potential interest to public company audit clients contemplating an auditor change, investors interested in learning about the consequences of PCAOB inspections, regulators concerned about the Big 4 dominance of the US audit market, and academics investigating audit quality differences. Inspections du PCAOB et écart de qualité de l'audit des cabinets appartenant et n'appartenant pas au groupe des Quatre Grands aux États‐Unis Les auteurs se demandent si l'incidence qu'a eu sur la qualité de l'audit le resserrement de la surveillance réglementaire — à savoir l'inspection initiale du PCAOB — diffère selon que les cabinets appartiennent ou n'appartiennent pas au groupe des Quatre Grands, afin de mieux saisir quelles sont les conséquences des inspections du PCAOB pour différents types de cabinets. Compte tenu de la divergence de points de vue quant à l'incidence des inspections du PCAOB, la relation entre ces inspections et l’écart de qualité de l'audit entre les cabinets appartenant et n'appartenant pas au groupe des Quatre Grands est une question d'ordre empirique. Concrètement, les auteurs considèrent comme une donnée le choix endogène de l'auditeur et utilisent une méthodologie d’écarts dans les différences tenant compte de l’échelonnement dans le temps de l'inspection initiale du PCAOB pour les cabinets d'audit de tailles différentes aux États‐Unis. Les résultats de l’étude semblent indiquer que l'amélioration de la qualité de l'audit attribuable à l'inspection initiale du PCAOB a été plus importante pour les cabinets appartenant au groupe des Quatre Grands que pour les autres cabinets ayant fait l'objet d'inspections à intervalle d'un an ou de trois ans. Les auteurs se penchent aussi séparément sur les cabinets n'appartenant pas aux Quatre Grands inspectés à intervalle d'un an et à intervalle de trois ans et constatent que l'effet d’écart de qualité de l'audit antérieur‐postérieur à l'inspection initiale chez les cabinets appartenant et n'appartenant pas au groupe des Quatre Grands est plus marqué dans le cas des cabinets n'appartenant pas aux Quatre Grands qui font l'objet d'une inspection à intervalle de trois ans. Dans le contexte plus large du marché de l'audit à concentration élevée aux États‐Unis, les constatations selon lesquelles les inspections du PCAOB accentuent l’écart de qualité de l'audit chez les cabinets appartenant et n'appartenant pas au groupe des Quatre Grands sont susceptibles d'intéresser les sociétés faisant appel public à l’épargne clientes des services d'audit qui envisagent de changer d'auditeurs, les investisseurs désireux de mieux connaître les conséquences des inspections du PCAOB, les autorités de réglementation préoccupées par la domination des Quatre Grands sur le marché américain de l'audit et les chercheurs qui étudient les écarts dans la qualité de l'audit.

Suggested Citation

  • Inder K. Khurana & Nathan G. Lundstrom & K. K. Raman, 2021. "PCAOB Inspections and the Differential Audit Quality Effect for Big 4 and Non–Big 4 US Auditors," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 376-411, March.
    • Handle: RePEc:wly:coacre:v:38:y:2021:i:1:p:376-411
    DOI: 10.1111/1911-3846.12636
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