Examining PCAOB disciplinary orders on small audit firms: Evidence from 2005 to 2018

Abstract

The purpose of this paper is to improve our understanding of small U.S. domestic audit firms and the quality of their audits. We use hand collected data from the Public Company Accounting Oversight Board's (PCAOB) website and provide an analysis based on 171 settled disciplinary orders issued to 150 small audit firms over the sample period from 2005 to 2018. We identify some key compliance issues associated with audits performed by small audit firms such as lack of due professional care, impaired auditor independence and inadequate engagement quality reviews. Our findings also indicate that risky clients (i.e., clients associated with disciplinary orders) pay higher audit fees and are less likely to receive a going concern opinion than peer clients not associated with a disciplinary order. Further, we discuss the implications of our research for practitioners, regulators and researchers in an attempt to enhance the overall health of the audit market.