An Examination of the Effects of PCAOB Inspection Selection Method and Disclosure of Audit Strengths on Investor Judgments

Jeffrey R. Cohen, Ganesh Krishnamoorthy, Marietta Peytcheva, Arnold M. Wright

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

SUMMARY: The PCAOB, in its inspection process, has historically focused on reporting audit deficiencies and used a risk-weighted selection method. In two experiments (focusing on a ‘‘micro’’ and a ‘‘macro’’ investment), we take a ‘‘what if’’ exploratory public policy perspective of evaluating the potential effects on investors’ audit quality judgments and investment decisions of two evolving PCAOB inspection practices: disclosure of audit strengths and deficiencies, and the use of a random inspection selection method. In both experiments, we manipulate: inspection reporting (only deficiencies under the historical PCAOB inspection reporting; only deficiencies under a ‘‘balanced’’ PCAOB reporting; or a report where strengths are present but outnumbered by deficiencies) and inspection selection method (risk-weighted or random). We find that disclosure of audit strengths is highly relevant to investment decisions, through influencing investors’ audit quality assessments and confidence in financial reporting. Investors also consider inspection selection method in macro-level, but not in micro-level judgments.

Original languageEnglish
Pages (from-to)107-133
Number of pages27
JournalAuditing
Volume41
Issue number4
Early online date1 Feb 2022
DOIs
Publication statusPublished - Nov 2022

Bibliographical note

Publisher Copyright:
© 2022, American Accounting Association. All rights reserved.

Keywords

  • audit quality
  • inspection deficiencies
  • inspection selection method
  • inspection strengths
  • investment decision
  • PCAOB inspection report
  • public policy

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