The Association between PCAOB Revenue-Related Inspection Deficiencies and Revenue Quality

Abstract

The Public Company Accounting Oversight Board (PCAOB) annually inspects Big
Four auditors. The PCAOB summarizes its findings (labeled ‘audit deficiencies’) in publicly
available reports on its website. While the PCAOB claims that its inspection findings and process
are designed to increase audit quality, there is limited empirical evidence to support this claim. We
examine whether changes in revenue-related audit deficiencies are associated with subsequent year changes in client revenue quality. In doing so, we use revenue quality – a common financial
reporting quality proxy – to infer audit quality. We predict that auditors will react asymmetrically
to changes in revenue-related audit deficiencies: increases in deficiencies will prompt audit quality
improving actions, whereas decreases will not. Briefly, our results support our prediction. We also
document that auditors' primary means to increase revenue quality is audit effort, as proxied by
audit fees.

Keywords: Audit reporting, PCAOB inspections, Revenue quality, Audit quality

JEL Classification: M42