The Association between PCAOB Revenue-Related Inspection Deficiencies and Revenue Quality

Abstract

The Public Company Accounting Oversight Board (PCAOB) annually inspects Big Four auditors. The PCAOB summarizes its findings (labeled ‘audit deficiencies’) in publicly available reports on its website. While the PCAOB claims that its inspection findings and process are designed to increase audit quality, there is limited empirical evidence to support this claim. We examine whether changes in revenue-related audit deficiencies are associated with subsequent year changes in client revenue quality. In doing so, we use revenue quality – a common financial reporting quality proxy – to infer audit quality. We predict that auditors will react asymmetrically to changes in revenue-related audit deficiencies: increases in deficiencies will prompt audit quality improving actions, whereas decreases will not. Briefly, our results support our prediction. We also document that auditors' primary means to increase revenue quality is audit effort, as proxied by audit fees.