Quality control system criticism raised by the Public Company Accounting Oversight Board in non-US jurisdictions and earnings quality of non-cross-listed clients

Abstract

This study investigates the association between Public Company Accounting Oversight Board (PCAOB) inspection‐related criticisms of an accounting firm's system of quality control and earnings quality of non‐cross‐listed clients in non‐US jurisdictions. We also assess whether this association is different in subsamples where a local independent inspection regime is present compared with jurisdictions without such a regime. We use a difference‐in‐difference design to assess changes in accruals quality in pre‐ and post‐inspection periods. Our sample includes 2006–2011 data on first‐time, international PCAOB inspections of Big 4 accounting firms in 19 countries. Our findings indicate that earnings quality improvement of non‐cross‐listed clients after international PCAOB inspections is higher for inspections with (versus without) PCAOB‐detected deficiencies of the system of quality control. We also find that this improvement occurs in countries with independent oversight of the audit profession.