PCAOB Inspections of Smaller CPA Firms: The Perspective of Inspected Firms

Abstract

SYNOPSIS: We solicit perceptions of the Public Company Accounting Oversight Board’s (PCAOB) inspection process from the leadership of triennial firms (100 or fewer publicly traded audit clients, inspected triennially) receiving their initial inspection. Our research is motivated by a growing stream of academic research related to triennial firms. Practitioners have called for research to determine whether the performance of audits in the Sarbanes-Oxley era may fail to attain the stated objective of enhancing investor confidence in the capital markets. Academics note further PCAOB inspection research can provide important insights into the consequences of PCAOB inspection for auditors and other market participants. In general, smaller respondents reported initial PCAOB inspections resulted in a negative impact on many aspects of their audit practices, while medium and larger firms reported more favorable consequences. Collectively, responding firms evaluated their initial inspection team’s performance favorably, but were more critical of other aspects of the inspection process. Levels of satisfaction with nearly all aspects of PCAOB inspections appear to increase with firm size and the passage of time. We interpret our findings as suggesting the efficacy of PCAOB inspections may be enhanced by focusing on potential unintended consequences and inspection process modifications rather than on inspectors’ qualifications and actions.