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

• Published in: Contemporary accounting research 2021-03, Vol.38 (1), p.376-411
• Main Authors: Khurana, Inder K., Lundstrom, Nathan G., Raman, K. K.
• Format: Article
• Language: English
• Subjects: Academic staff; Audit quality; Auditor changes; Audits; Big 4 auditors; Big Four accounting firms; Cabinet; cabinets d'audit appartenant au groupe des Quatre Grands; cabinets d'audit n'appartenant pas au groupe des Quatre Grands; Dominance; Endogenous; initial PCAOB inspections; inspection initiale du PCAOB; Inspections; non–Big 4 auditors; regulatory scrutiny; Scrutiny; Specification; Surveillance; surveillance réglementaire
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/1911-3846.12636

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. RÉSUMÉ 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 méthodolog