Exploring PCAOB inspection results for audit firms headquartered outside of the US

Abstract

This study examines the audit quality, measured using Public Company Accounting Oversight Board (PCAOB) reports, for audit firms headquartered outside of the United States (US). We hypothesize and test if differences in firm audit quality as measured by PCAOB inspection deficiencies exist depending upon the size and nature of arrangements with other audit firms. More specifically, we examine five different categories of auditing firm arrangement: Big Four network affiliates; BDO and Grant Thornton network affiliates; firms with other network affiliations; firms with associations and alliances; and other (unknown or no stated affiliation). In this underexplored area of research, we find that non-US firms without formal connections to other firms have lower audit quality in comparison to the other four arrangement types. Our analysis also suggests that those with more formal connections (i.e., networks and larger associations/alliances arrangements) have similar levels of audit quality. Moreover, our results suggest that network firms that primarily do work referred to them by US audit firms have better results on PCAOB inspections; however, we do not find this relationship for associations and alliances. As the PCAOB explores group audit work standards, it is imperative that a more nuanced understanding of global audit quality progresses.