PCAOB Inspections of International Audit Firms: Initial Evidence

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paper examines PCAOB inspections of international audit firms, based on an analysis of 175 first-time and 56 second-time inspection reports issued through February 4, 2012. We find that just over half of the inspection reports identify audit deficiencies, and two-thirds cite quality control defects. Deficiency firms are smaller, but have more issuer clients than no-deficiency firms, reflecting possible over-extension into the issuer audit market. Affiliates of Big 4 firms are less likely to have deficiencies than are other firms. We find no significant differences in the rate of audit deficiencies or quality control defects based on whether the PCAOB acts alone or cooperates with a local regulator in conducting the inspection, or based on the home country's legal tradition (common law versus other). Audit deficiencies are most often related to substantive testing and the failure to perform sufficient audit procedures. The deficiencies most commonly relate to the balance sheet, while the individual account cited most often is revenues. Unlike prior research that examines US firms, there is no difference in the rate of audit deficiencies or quality control defects for first-time versus second-time inspections.