اثرات بازار حسابرسی با مجادله با کمبود GAAP، بازرسی گزارش PCAOB The audit market effects of disputing a GAAP-deficient PCAOB inspection report

1. Introduction In response to corporate accounting and auditing failures at companies such as Enron and WorldCom, the Sarbanes-Oxley Act (SOX) of 2002 was enacted. One of the more salient regulatory aspects of SOX was the creation of the Public Company Accounting Oversight Board (PCAOB). The PCAOB – which replaced the prior peer-review regime – is charged with the responsibility of “auditing the auditors.” More speci- fically, SOX grants the PCAOB with the authority to inspect and review the workpapers of all accounting firms that provide auditing services to publicly traded companies. The PCAOB summarizes its findings in publicly available inspection reports available on its website and does so on an annual (triennial) basis for auditors with at least 100 (< 100) audit clients. The accessibility, variation and source creditability of the reports suggests their possible use as audit quality signals. Extant studies have generally documented stakeholder response to GAAPdeficient inspection reports in the context of the auditor dismissal decision (Abbott et al., 2013; Abbott, Brown, & Higgs, 2016; Daugherty, Dickins, & Tervo, 2011).1 More specifically, prior research finds that GAAP-deficient, triennially inspected auditors are more likely to be dismissed vis-à-vis those triennially inspected firms that are not. However, this line of research has not yet examined the auditor’s response to a GAAP-deficient PCAOB inspection report and any corresponding effect on the auditor dismissal decision. When presented with a GAAP-deficient inspection report, the auditor has three response disclosure strategies: ignore, acknowledge or dispute.2 In the cases of ignoring, the PCAOB inspection report contains the PCAOB inspection team findings and the report is devoid of any meaningful, auditor-generated communications. In the case of acknowledgement, the auditor usually expresses its respect for the inspection process and acknowledges the audit engagement and/or quality control deficiencies cited by the PCAOB within the inspection report. In cases of dispute, the auditor explicitly states a difference of opinion with respect to the inspection process and/or inspection report findings. In this paper, we investigate whether and to what extent an auditor’s dispute disclosure strategy impacts the likelihood of dismissing a GAAP-deficient, triennially inspected auditor. We predict a dispute strategy enables a GAAP-deficient auditor to signal that it correctly interpreted GAAP and employed GAAS-compliant audit procedures. Thus, a dispute strategy has a twofold effect of (a) diminishing the PCAOB inspection findings and (b) reducing the likelihood of dismissal. We also argue a dispute strategy acts as a form of client advocacy. More specifically, GAAP-deficient PCAOB inspection reports often contain the phrases ‘the (reported audit) deficiencies related…to an aspect…the issuer revised in a restatement subsequent to the primary inspection procedures’ or ‘failed to identify material departures from GAAP.’ By disputing the PCAOB’s findings, an auditor may also be defending the client’s accounting treatments and decisions. That is, if the pre-audited financial statements did not contain a material misstatement, the PCAOB would render a GAAS-deficient inspection report. In a GAAS-deficient inspection report, the PCAOB implies that the financial statements audited by the auditor are free of material error and the auditor’s opinion is correct. However, the manner in which the auditor collected audit evidence to support his/ her (ultimately correct) audit opinion did not comply with GAAS. Consequently, when a GAAP-deficient auditor employs a dispute strategy, the auditor may be shielding both the audit firm and its clients from potential litigation. An acknowledgement strategy may actually exacerbate litigation concerns as it may confirm the PCAOB’s contention that the financial statements contained a material error.