Public company accounting oversight board insights into the inspection process, environment, and reports

The Public Company Accounting Oversight Board (PCAOB) performs inspections of accounting firms with fewer than 100 clients listed on an American stock exchange on a three-year cycle. The inspections of the audit work of these firms (hereafter, small public practice firms) are the focus of this study. I posit that a firm that received a clean prior inspection outcome, i.e., no engagement deficiencies or quality control issues, is less likely to have an increase in the number of audit clients inspected during the current inspection than firms that received other prior inspection outcomes. Controlling for the current client portfolio characteristics, I find that an average firm with a prior clean report has a 6% decrease in the probability of an increase in the number of client files inspected with the current inspection as compared to firms with different prior inspection outcomes. This finding provides evidence consistent with a dynamic relationship among the PCAOB and the firms. For practitioners, these results show that the PCAOB conditions subsequent inspections on past inspection results.;The inspection process and frequency for small public practice firms does not depend on whether the firm is headquartered in the United States (US) or abroad. I examine the impact of a home country regulator on foreign firm inspection reports issued by the PCAOB. Some foreign regulators are similar to the PCAOB. A PCAOB-like regulator belongs to the International Forum of Independent Audit Regulators and employs personnel to inspect accounting firms. Alternative regulatory regimes include regulators that indirectly oversee the accounting firms through an intermediary professional organization. I hypothesize and find evidence that foreign firms subject to PCAOB-like regulator are more likely to receive a clean inspection outcome from the PCAOB as compared to foreign firms in alternative regulatory environments. For the average firm, a PCAOB-like regulator increases the probability of a clean PCAOB inspection outcome by 21% as compared to an engagement deficient outcome. However, I find no evidence that the regulatory environment otherwise impacts the probability of a clean inspection outcome as compared to a quality deficient inspection outcome. The association between the home country regulatory environment and PCAOB inspection outcomes provides evidence of the inconsistent application of a single set of standards globally. For international audit standard setters, these results support the creation of an enforcement function for international auditing standards.;Finally, I use the creation of a new position, PCAOB inspector, and the typical staffing of this position with individuals having extensive Big 4 external audit experience to derive hypotheses based on role theory. Theory models the interaction of an individual's role within the organization in which s/he works using role ambiguity as an interceding factor in the relationship between the individual and the organization. Role ambiguity exists if the individual does not have the required data and understanding to execute her/his position. Theory posits that a high level of role ambiguity translates into inferior job performance. I hypothesize and test (1) high role ambiguity, e.g., when the inspector reviews work papers for a public client engagement fundamentally different than an inspector's prior experience and (2) low role ambiguity, e.g. when the PCAOB leadership state specific areas of focus for inspectors, for associations with specific PCAOB inspection report wording outcomes, representing job performance. Because each inspection report follows a standard reporting review processes within the PCAOB and the inspectors are typically experienced auditors who are familiar with the execution of auditing standards, there may not be an association between the role ambiguity of an inspector and the wording outcomes of an inspection report. I find that ambiguity is positively associated with the likelihood of financial statement assertion words, e.g., completeness or valuation, representing the most basic auditing risks. I find that ambiguity is negatively associated with the likelihood of words embodying key areas of focus for inspections as stated by PCAOB leadership. For investors, these findings emphasize that the PCAOB inspector subjectively adjusts the wording of an inspection deficiency. (Abstract shortened by UMI.).