Careers
SubscribePublished Paper: The Economic Consequences of Audit Firm's Quality Control System Deficiencies
Paper author: Daniel Aobdia
Publication: Management Science
Abstract: This study investigates the association between the largest audit firms’ internal organization and audit quality and efficiency. Using a unique dataset of firm-wide deficiencies in the quality control (QC) systems identified by the PCAOB during its inspections of audit firms, I find a negative association between firm-level QC deficiencies and audit quality. Furthermore, audits conducted by audit firms with more organization-level deficiencies appear less efficient, as evidenced by more hours worked on the engagements, despite audit fees remaining unchanged and audit quality being worse. These results appear to be partly driven by deficiencies in the tone at the top (a proxy for culture) and the audit methodology. In contrast, audit firms with more deficiencies of a practical nature (audit performance issues) do not appear to spend enough effort on their audit, consistent with a "shirking" hypothesis. Overall, these results suggest that while both practical-level and organization-level deficiencies negatively influence audit quality, their root causes are different.
Disclaimer
The economic research fellows and staff economists generate high-quality working papers that inform the oversight activities of the PCAOB and are disseminated to stimulate discussion and critical comment to the benefit of the public. Working papers are preliminary materials that have not been approved by the Board and reflect only the views of the author(s).
The research topics of economic research fellows, including a description of any nonpublic data sets required for research, are presented to the Board for approval and research papers are reviewed to confirm that the topic of the paper is consistent with the researcher's proposal. That review does not, however, encompass an evaluation of the conclusions reached by researchers.