International PCAOB Inspections and Earnings Management Transmission within Multinational Business Groups

Abstract

Does the impact of international Public Company Accounting Oversight Board (PCAOB) inspections extend beyond country borders of inspected auditors? We investigate this question by examining multinational business groups. Following initial PCAOB inspections of accounting firms auditing foreign U.S.-listed global ultimate owners, our findings indicate that their international subsidiaries decrease earnings management. Research design choices such as the comparison of treated observations with same country-industry-year control observations and a fixed effects structure that controls for country, industry, year, and group characteristics mitigate concerns of omitted variables. Our paper provides evidence for benefits of international PCAOB inspections over and above the previously documented effects for firms located in the countries of the inspected auditors.