Audit Quality and the PCAOB

The PCAOB, charged with oversight of public company audits, has received a great deal of criticism as of late. Clive Lennox and Jeffrey Pittman add to the debate with their paper, Auditing the auditors: Evidence on the recent reforms to the external monitoring of audit firms, which was recently accepted for publication in the Journal of Accounting and Economics (HT Harvard Law School Corporate Governance Blog).

The paper focuses on the value of PCAOB inspection reports, which have replaced peer review reports as the primary source of information about audit firm quality. The authors find that:

• PCAOB inspection reports are not a meaningful signal of audit quality to audit clients
• Peer review reports are less informative than they were prior to the initation of PCAOB inspections

These findings imply that we know less about audit quality under the current regulatory structure. This reduction in knowledge causes concern, as a strong, independent audit is a significant deterrant to fraud.

The full text of the paper can be found here.