The Association between PCAOB Revenue-Related Inspection Deficiencies and Revenue Quality

57 Pages Posted: 11 Jan 2021 Last revised: 28 Jan 2021

See all articles by Lawrence Abbott

Lawrence Abbott

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

Colleen M. Boland

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

Sean McCarthy

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

Laura Swenson

University of Wisconsin - Milwaukee

Date Written: January 26, 2021

Abstract

The Public Company Accounting Oversight Board (PCAOB) annually inspects Big
Four auditors. The PCAOB summarizes its findings (labeled ‘audit deficiencies’) in publicly
available reports on its website. While the PCAOB claims that its inspection findings and process
are designed to increase audit quality, there is limited empirical evidence to support this claim. We
examine whether changes in revenue-related audit deficiencies are associated with subsequent year changes in client revenue quality. In doing so, we use revenue quality – a common financial
reporting quality proxy – to infer audit quality. We predict that auditors will react asymmetrically
to changes in revenue-related audit deficiencies: increases in deficiencies will prompt audit quality
improving actions, whereas decreases will not. Briefly, our results support our prediction. We also
document that auditors' primary means to increase revenue quality is audit effort, as proxied by
audit fees.

Keywords: Audit reporting, PCAOB inspections, Revenue quality, Audit quality

JEL Classification: M42

Suggested Citation

Abbott, Lawrence and Boland, Colleen M. and McCarthy, Sean and Swenson, Laura, The Association between PCAOB Revenue-Related Inspection Deficiencies and Revenue Quality (January 26, 2021). Available at SSRN: https://ssrn.com/abstract=3724508 or http://dx.doi.org/10.2139/ssrn.3724508

Lawrence Abbott

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

Colleen M. Boland (Contact Author)

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

Sean McCarthy

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

Laura Swenson

University of Wisconsin - Milwaukee ( email )

Bolton Hall 802
3210 N. Maryland Ave.
Milwaukee, WI 53211
United States

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