PCAOB Inspections and Audit Fees: An Analysis of Inspection Rounds of Small Audit Firms

Ann Vanstraelen, Lei Zou*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

This study investigates the impact on audit pricing of PCAOB inspection outcomes on the quality control systems of small audit firms. Quality control deficiencies (QCDs) provide a strong signal about audit quality, which is expected to lead to price changing. We first document that audit fees in the pre-inspection period were higher for small audit firms without QCDs, implying that quality differences were already partially known and priced in the market. Next, we find evidence that in the post-inspection period audit fees further increase for firms without QCDs, while there is limited evidence for fee increases for firms with remediated QCDs, suggesting changes in audit firm reputation. Interestingly, we do not find support for fee changes for audit firms with disclosed quality control deficiencies. Finally, the magnitude of change in audit fees decreases over time. Collectively, these findings contribute to our understanding of audit quality differences amongst small audit firms and the functioning of the small audit firm market.
Original languageEnglish
Number of pages32
JournalEuropean Accounting Review
DOIs
Publication statusE-pub ahead of print - 21 Oct 2020

Keywords

  • PCAOB inspections
  • Audit fees
  • Quality control deficiencies
  • Small audit firms
  • PUBLIC OVERSIGHT
  • BUSINESS RISK
  • QUALITY
  • IMPACT
  • REPUTATIONS
  • SANCTIONS
  • SOX

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