The Efficacy of PCAOB Operational Decision Making

Abstract

The PCAOB’s operating budget and related investment in its inspection program have increased substantially since its inception. To provide insights into the efficacy of this increased investment, we leverage the PCAOB’s decision to open five new satellite offices in 2009. We begin by examining the market-level factors associated with the PCAOB’s expansion decisions and find that the PCAOB opened offices in markets where increased oversight was likely to have the greatest beneficial impact on audit quality. We then use a difference-in-differences empirical design to consider the impacts of the expansion on several engagement-level audit outcomes. We find that audit quality significantly improved following the PCAOB’s expansion in markets where new offices opened relative to markets without an office opening. While we find no evidence that auditors affected by the office expansion passed on costs directly to their clients through increased audit prices, we do find evidence of an indirect cost associated with the expansion in the form of a relative increase in auditor turnover. Collectively, our findings provide new insights into the PCAOB’s post-implementation operational decision making and suggest that the regulator’s additional investment in audit oversight was effective in improving audit quality without imposing a significant direct cost on companies and shareholders.