Keywords

accountability theory, PCAOB, inspections, audits

Abstract

We investigate the costs and benefits of the PCAOB’s risk-based inspection regime by studying how auditors respond to engagement-level inspection risk. Using an established inspection selection model, we find evidence that auditors behave consistent with accountability theory when auditing clients with elevated ex-ante inspection risk. Specifically, we observe an increased propensity to report material weaknesses, a decreased propensity to assert that previous material weaknesses have been remediated, increased audit effort, and a decreased likelihood of subsequent financial statement restatement. In general, these outcomes reflect auditors’ attempts to minimize negative inspection outcomes in a way that could be beneficial to investors. However, auditors’ apparent focus on relative inspection risk also creates potential costs for investors as evidenced by an increased likelihood of resignation from the client and inattention to clients with relatively lower inspection risk when auditor resources are most constrained. Importantly, several tests provide evidence that auditors’ response to inspection risk is distinct from and incremental to their response to misstatement risk. Overall, our findings suggest that there are potential benefits and potential costs associated with auditors’ responses to a selection approach that is primarily risk-based.

Original Publication Citation

"Costs and Benefits of a Risk-Based PCAOB Inspection Regime", Accounting, Organizations, and Society, Volume 112, 2024

Document Type

Peer-Reviewed Article

Publication Date

2024

Publisher

The Accounting Review

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Associate Professor

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