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    PCAOB INTERNATIONAL INSPECTION AND AUDIT QUALITY

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    Genre
    Thesis/Dissertation
    Date
    2012
    Author
    Song, Hakjoon
    Advisor
    Krishnan, Jagan
    Krishnan, Jayanthi
    Committee member
    Basu, Sudipta, 1965-
    Gordon, Elizabeth A. (Associate professor)
    Aaronson, William Edson
    Department
    Business Administration/Accounting
    Subject
    Accounting
    Audit Quality
    Earnings Quality
    Going Concern Opinion
    Pcaob Inspection
    Sox
    Value Relevance
    Permanent link to this record
    http://hdl.handle.net/20.500.12613/2431
    
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    DOI
    http://dx.doi.org/10.34944/dspace/2413
    Abstract
    The Public Company Accounting Oversight Board (PCAOB) has recently begun inspecting foreign audit firms. An important policy concern is that several foreign jurisdictions have refused to allow the PCAOB to conduct inspections of their audit firms. In this dissertation, I investigate (1) whether audit quality is higher for client firms (henceforth "complying" clients) whose foreign auditors have been inspected by the PCAOB, compared to client firms (henceforth "blacklisted" clients) of foreign auditors whose governments have refused inspections by the PCAOB, and (2) whether audit quality improves in the post inspection period for clients of inspected foreign auditors. I use abnormal accruals, total accruals, value relevance, and the likelihood of receiving a going concern opinion as proxies for audit quality. I conduct empirical tests on two samples, a cross-sectional sample consisting of blacklisted and complying clients, and a longitudinal sample of clients of inspected foreign auditors before and after PCAOB inspections. For the going-concern models, the samples are confined to financially distressed firms, which are either clients with negative net income or negative operating cash flows or clients in the top quartile in the bankruptcy probability distribution. The cross-sectional models indicate that blacklisted clients have significantly higher abnormal and total accruals, lower value relevance and a lower likelihood of receiving a going concern opinion, than complying clients, suggesting that clients of PCAOB-inspected auditors seem to have higher audit quality. Moreover, longitudinal analyses of clients of inspected foreign auditors show that abnormal accruals and total accruals are lower after PCAOB inspections than before inspections, and value relevance is greater after inspections than before. The likelihood of receiving a going concern opinion is higher after PCAOB inspections than before inspections for one of the two distressed-firm samples. Overall, the results are generally consistent with the PCAOB's claim that the clients of foreign audit firms that have undergone PCAOB inspections have benefited from the inspections. Further analyses indicate that the benefits are concentrated in jurisdictions where the PCAOB has conducted joint inspections with local authorities, in countries where legal traditions follow common law, and for clients of Big 4 auditors.
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