Does Public Company Accounting Oversight Board Regulatory Enforcement Deter Low-Quality Audits?
Lamoreaux, Phillip T., Mowchan, Michael, Zhang, Wei
The Accounting Review · 2023 · Volume 98 · Issue 3
Abstract
Regulatory economics suggests that one benefit of public enforcement is the deterrence of improper conduct. Using a difference-in-differences (DiD) design, we investigate whether a deterrence effect follows the revelation of Public Company Accounting Oversight Board (PCAOB) enforcement. We find that large audit firm offices improve audit quality following enforcement naming another officewithin their firmwhile small firm offices improve following enforcement oflocal small firm competitors, with these responses varying by enforcement type. To understand potential mechanisms for the geographic deterrence effect, we examine the first occurrence of a revoked PCAOB registration within a market and find that results are stronger if there is greater news coverage or if nonsanctioned firms are in closer proximity to the sanctioned auditor. Supplemental tests reveal that results are stronger when nonsanctioned auditor clients are similar to the sanctioned firm’s clientele. Our findings suggest a positive but varied deterrence effect following PCAOB enforcement. JEL Classifications:G38; M42; M48.
Keywords
PCAOB enforcement, audit quality, regulation, restatements, sanctions
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