Working Paper: The Economic Consequences of Audit Firm's Quality Control System Deficiencies

​​​​Paper author: Daniel Aobdia 

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.