This study aims to investigate whether the frequency of Public Company Accounting Oversight Board (PCAOB) inspections affects the quality of internal control opinions issued by auditors and to explore the underlying factors behind this impact.
This study analyzes a sample of accelerated filers from 2008 to 2019 that were audited by non-Big Four firms. The frequency of PCAOB inspections is determined by the number of clients served by the audit firm. Firms with more than 100 clients are classified as annually inspected audit firms, while those with 100 or fewer clients are classified as triennially inspected audit firms. Internal control opinion quality is assessed based on the presence of errors in the auditor’s internal control opinion, which are classified as either Type I or Type II errors if they occur. Multiple regression models and logit regression models are used to examine the relationship between PCAOB inspection frequency and internal control opinion quality.
This study finds that audit firms with less frequent inspections are more susceptible to errors in internal control opinions. The findings reveal that audit firms subject to triennial inspections report fewer errors in internal control during inspection years, suggesting potential opportunistic behavior among auditors. Furthermore, under steady disciplinary pressure, PCAOB inspections encourage audit firms to continually improve and sustain their capabilities, thereby enhancing the quality of internal control reports.
These findings can guide future policy decisions on PCAOB inspection frequency. Although more frequent inspections may lead to higher costs, they can play a crucial role in enhancing auditors’ skills and, consequently, in improving overall audit quality.
This study provides a more comprehensive assessment of the relationship between inspection frequency and financial statement quality, contributing to the literature on the outcomes of PCAOB inspections.
