The effect of PCAOB inspections on Big 4 audit quality

Abstract

This paper examines whether the PCAOB inspection process results in an improvement in the quality of audits provided by Big 4 firms. We measure audit quality by examining changes in auditee abnormal accruals following each of the first two PCAOB inspections. We find a significant reduction in abnormal accruals in the year following the first PCAOB inspection, and we find a further reduction in abnormal accruals in the year following the second PCAOB inspection. These results are generally stronger for auditees that reported positive abnormal accruals before the initial PCAOB inspection. Our results provide preliminary evidence that the PCAOB inspection process has led to improved audit quality, at least as measured by a reduction in auditee earnings management. © 2011.