IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2609.24020.html

Audit the Auditors: Commitment versus Professional Judgment

Author

Listed:
  • Pingyang Gao
  • Jinzhi Lu
  • Zhenpeng Yang

Abstract

This paper provides a theoretical framework to evaluate the trade-off between the self-regulated peer review system and independent government inspection (PCAOB) in the auditing profession. We model the peer review system as a Judgment Regime, where a stakeholder utilizes professional expertise, captured as a private signal, to make ex-post decisions on verifying audit failures. In contrast, PCAOB inspection is modeled as a Commitment Regime, where the stakeholder lacks private information but can commit ex-ante to a predetermined level of verification. We find that the Judgment Regime benefits from a resource-allocation effect and a deterrence effect driven by informed verification, whereas the Commitment Regime deters audit failures through the first-mover advantage of ex-ante commitment. Our analysis demonstrates that the stakeholder prefers the peer review system if and only if the private signal is sufficiently informative. Furthermore, comparative statics reveal that higher verification costs or stronger audit incentives shift the stakeholder's preference toward PCAOB inspection.

Suggested Citation

  • Pingyang Gao & Jinzhi Lu & Zhenpeng Yang, 2026. "Audit the Auditors: Commitment versus Professional Judgment," Papers 2609.24020, arXiv.org.
    • Handle: RePEc:arx:papers:2609.24020
    as

    Download full text from publisher

    File URL: https://arxiv.org/pdf/2609.24020
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Po-Chang Chen & Charles Moul & Andrew Reffett, 2025. "Do PCAOB Inspections Change the Effect of Litigation Risk on Audit Quality?," The International Journal of Accounting (TIJA), World Scientific Publishing Co. Pte. Ltd., vol. 60(01), pages 1-40, March.
    2. Lennox, Clive & Pittman, Jeffrey, 2010. "Auditing the auditors: Evidence on the recent reforms to the external monitoring of audit firms," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 84-103, February.
    3. Lindsay M. Johnson & Marsha B. Keune & Jennifer Winchel, 2019. "U.S. Auditors' Perceptions of the PCAOB Inspection Process: A Behavioral Examination†," Contemporary Accounting Research, John Wiley & Sons, vol. 36(3), pages 1540-1574, September.
    4. DeFond, Mark L., 2010. "How should the auditors be audited? Comparing the PCAOB Inspections with the AICPA Peer Reviews," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 104-108, February.
    5. Brandon Gipper & Christian Leuz & Mark Maffett, 2020. "Public Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime," The Review of Financial Studies, Society for Financial Studies, vol. 33(10), pages 4532-4579.
    6. Lamoreaux, Phillip T., 2016. "Does PCAOB inspection access improve audit quality? An examination of foreign firms listed in the United States," Journal of Accounting and Economics, Elsevier, vol. 61(2), pages 313-337.
    7. 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.
    8. Dye, Ronald A, 1993. "Auditing Standards, Legal Liability, and Auditor Wealth," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 887-914, October.
    9. Mingcherng Deng & Nahum Melumad & Toshi Shibano, 2012. "Auditors’ Liability, Investments, and Capital Markets: A Potential Unintended Consequence of the Sarbanes‐Oxley Act," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 50(5), pages 1179-1215, December.
    10. Christensen, Brant E. & Newton, Nathan J. & Wilkins, Michael S., 2024. "Costs and benefits of a risk-based PCAOB inspection regime," Accounting, Organizations and Society, Elsevier, vol. 112(C).
    11. DeFond, Mark L. & Lennox, Clive S., 2011. "The effect of SOX on small auditor exits and audit quality," Journal of Accounting and Economics, Elsevier, vol. 52(1), pages 21-40, June.
    12. Minlei Ye & Dan A. Simunic, 2013. "The Economics of Setting Auditing Standards," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 1191-1215, September.
    13. Fung, Simon Yu Kit & Raman, K.K. & Zhu, Xindong (Kevin), 2017. "Does the PCAOB international inspection program improve audit quality for non-US-listed foreign clients?," Journal of Accounting and Economics, Elsevier, vol. 64(1), pages 15-36.
    14. Aobdia, Daniel & Shroff, Nemit, 2017. "Regulatory oversight and auditor market share," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 262-287.
    15. Kimberly D. Westermann & Jeffrey Cohen & Greg Trompeter, 2019. "PCAOB Inspections: Public Accounting Firms on “Trial”," Contemporary Accounting Research, John Wiley & Sons, vol. 36(2), pages 694-731, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hanlon, Michelle & Shroff, Nemit, 2022. "Insights into auditor public oversight boards: Whether, how, and why they “work”," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    2. Sarah B. Stuber & Chris E. Hogan, 2021. "Do PCAOB Inspections Improve the Accuracy of Accounting Estimates?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 59(1), pages 331-370, March.
    3. Prabashi Dharmasiri & Soon-Yeow Phang & Ashna Prasad & John Webster, 2022. "Consequences of Ethical and Audit Violations: Evidence from the PCAOB Settled Disciplinary Orders," Journal of Business Ethics, Springer, vol. 179(1), pages 179-203, August.
    4. Daniel Aobdia & Edward Xuejun Li & K. Ramesh & Min Shen, 2026. "Deciphering the PCAOB Inspection Process: Evidence and Predictive Insights from Public Data," Management Science, INFORMS, vol. 72(7), pages 6120-6145, July.
    5. Marta TACHE & Florentina- Åžtefania NEAGU & Natalia MANEA & Mihaela PURCARU, 2023. "Ï»¿The Benefits Of Pob Inspections. Case Of Romania," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(25), pages 1-11.
    6. Bingyi Chen & Jenelle K. Conaway, 2022. "Do U.S. Investors Value Foreign Component Auditors?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 60(3), pages 805-851, June.
    7. Fung, Simon Yu Kit & Raman, K.K. & Zhu, Xindong (Kevin), 2017. "Does the PCAOB international inspection program improve audit quality for non-US-listed foreign clients?," Journal of Accounting and Economics, Elsevier, vol. 64(1), pages 15-36.
    8. Christensen, Brant E. & Newton, Nathan J. & Wilkins, Michael S., 2024. "Costs and benefits of a risk-based PCAOB inspection regime," Accounting, Organizations and Society, Elsevier, vol. 112(C).
    9. Phillip T. Lamoreaux & Landon M. Mauler & Nathan J. Newton, 2020. "Audit Regulation and Cost of Equity Capital: Evidence from the PCAOB's International Inspection Regime," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2438-2471, December.
    10. Jagan Krishnan & Jayanthi Krishnan & Steven A. Maex, 2024. "Does audit firm hiring of former PCAOB personnel improve audit quality?," Review of Accounting Studies, Springer, vol. 29(4), pages 3130-3175, December.
    11. Kim, Yongtae & (Nancy) Su, Lixin & (Stephen) Zhou, Gaoguang & (Kevin) Zhu, Xindong, 2020. "PCAOB international inspections and Merger and Acquisition outcomes," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    12. Christensen, Brant & Lei, Lijun (Gillian) & Shu, Sydney Qing & Thomas, Wayne, 2023. "Does audit regulation improve the underlying information used by managers? Evidence from PCAOB inspection access and management forecast accuracy," Accounting, Organizations and Society, Elsevier, vol. 106(C).
    13. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    14. Liu, Lisa Yao & Tong, Lijing, 2026. "The spillover effect of public firm audit regulation on private firm auditing: Evidence from common partners," Journal of Accounting and Economics, Elsevier, vol. 81(3).
    15. Aobdia, Daniel & Dou, Yiwei & Kim, Jungbae, 2021. "Public audit oversight and the originate-to-distribute model," Journal of Accounting and Economics, Elsevier, vol. 72(1).
    16. Henry L. Friedman & Lucas Mahieux, 2021. "How Is the Audit Market Affected by Characteristics of the Nonaudit Services Market?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 59(3), pages 959-1020, June.
    17. Elizabeth Carson & Phillip Lamoreaux & Roger Simnett & Ulrike Thürheimer & Ann Vanstraelen, 2026. "Establishment of National Public Audit Oversight Boards: Descriptive Evidence and Implications for Audit Quality," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 64(1), pages 127-180, March.
    18. Flasher, Renee & Schenck, Kristy, 2019. "Exploring PCAOB inspection results for audit firms headquartered outside of the US," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 37(C).
    19. Aobdia, Daniel & Liu, Xuejiao & Na, Ke & Wu, Hong, 2025. "Client restatement announcement, audit office human capital investment, and audit quality improvements," Journal of Accounting and Economics, Elsevier, vol. 79(2).
    20. Daniel Aobdia, 2020. "The Economic Consequences of Audit Firms’ Quality Control System Deficiencies," Management Science, INFORMS, vol. 66(7), pages 2883-2905, July.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2609.24020. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: https://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.