The PCAOB Inspection Process: A Client-Level Analysis of a Large Firm’s Experience

Abstract

We use proprietary archival data to examine one annually inspected audit firm’s experience with the PCAOB inspection process. We find that the firm’s audits are primarily selected for inspection due to client characteristics, while deficiencies identified by inspectors are related to characteristics of both the client and the audit team. We also find that not all identified audit deficiencies are reported to the public. However, we find some evidence that only publicly disclosed deficiencies are associated with ex-post measures of audit quality, suggesting that the PCAOB releases only the most relevant and material information to the public. Finally, we find that inspections affect the concurrent year’s audit team staffing decisions and reduce the proportion of the audit that is completed during the interim period. Overall, our study provides important insights into the PCAOB inspection process while also developing and validating a model of inspection risk for future researchers.