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The impact of the PCAOB's oversight program on non-U.S. audit firms

posted on 22.02.2017, 00:51 authored by Webster, John Charles
Established by way of the Sarbanes-Oxley Act of 2002 (SOX), the Public Company Accounting Oversight Board (PCAOB) is an independent auditor regulatory body mandated to strengthen audit quality. The introduction of the PCAOB was heralded as a significant and profound change in the audit profession ending over 100 years of peer-review self-regulation in the United States (U.S.) PCAOB rules stipulate that all audit firms – whether located in the U.S. or abroad – that provide substantial assurance to U.S. public companies must be registered with, and inspected by, the PCAOB. The PCAOB is, therefore, required to inspect non-U.S. domiciled registered audit firms (in addition to U.S. registered audit firms) and does so via its international oversight program. The purpose of this study is to investigate the PCAOB’s oversight of non-U.S. domiciled registered audit firms, and empirically examine whether it has contributed to improvements in audit quality. Using a pre/post research design that examines audit quality outcomes, before and after the commencement of the PCAOB's international oversight program, this study examines whether the PCAOB's international oversight strengthens the audit quality for non-U.S. registered audit firms. Based on arguments that the incentives of auditors to produce high quality assurance are affected by institutions that regulate auditing and punish auditors for misconduct and inferior audits, it is conjectured that the PCAOB, through its increased regulatory scrutiny and high penalties for misconduct, provides non-U.S. registered audit firms with ex-ante incentives to augment audit quality. Using this as a theoretical framework, this thesis empirically examines whether the PCAOB’s international oversight program has led to an improvement in audit quality (RQ1), and whether audit firm size (Big 4 versus non-Big 4 (RQ2)) as well as the method of PCAOB inspection (PCAOB-only and joint-PCAOB inspections) influence the PCAOB’s ability to augment audit quality (RQ3). Furthermore, possible knowledge spillover consequences for non-U.S. public company audits are examined in RQ4. The findings provide some support for the conjecture that the PCAOB’s international oversight program has contributed to improvements in audit quality for non-U.S. audit firms under the auspices of the PCAOB. In particular, multivariate results show that client firms are less likely to just-meet earnings benchmarks, display less abnormal accruals, and have a greater propensity to be issued with a going-concern audit report when in financial distress subsequent to the introduction of the PCAOB’s international oversight program. The results of examining joint-PCAOB and PCAOB-only inspections reveal no significant differences in the audit quality proxies between client firms subjected to joint-PCAOB inspections and those subjected to PCAOB-only inspections. This suggests that there is no incremental value in the PCAOB’s joint inspection program over-and-above those inspections conducted solely by the PCAOB’s inspectors. Finally, only limited evidence is found to support the notion that the PCAOB’s international oversight program results in firm-wide knowledge spillover effects through improvements in audit quality for those client engagements under the indirect supervision of the PCAOB’s inspectors (i.e., non-U.S. domestic client firms that do not issue securities in the U.S.). In particular, the results reveal that client firms’ working capital abnormal accruals decline following a PCAOB inspection.


Campus location


Principal supervisor

Keryn Chalmers

Additional supervisor 1

Don Stokes

Year of Award


Department, School or Centre

Monash Business School


Doctor of Philosophy

Degree Type



Faculty of Business and Economics