Working Paper: The Validity of Publicly Available Measures of Audit Quality - Evidence from the PCAOB Inspection Data

​​​​Paper Author: Daniel Aobdia

Research focus: This study provides an empirical assessment of the validity of several widely used measures of audit quality. Multiple proxies have been used in prior audit literature as measures of audit quality including, among others, discretionary accruals, the propensity to meet/beat specific earnings benchmarks, the issuance of going concern opinions, and restatements. Prior literature has qualitatively argued that these measures represent valid measurements of audit quality but with little consensus as to which measures are best. This paper investigates the ability of these commonly used measures to predict Part I findings identified during the PCAOB inspection process.

Background note: A "Part I finding" is issued when the inspection team determines, based on applicable standards, that the work conducted by the audit engagement team was not sufficient to support the audit opinion. Part I findings are made public and are available on the PCAOB's web site. Additional reference information can be found in the Board public document "Information for Audit Committees about the PCAOB Inspection Process" (PCAOB Release No. 2012-003, August 1, 2012). Some of the public measures of audit quality analyzed by Aobdia are also discussed as potential audit quality indicators in the PCAOB's Concept Release on that topic.

Conclusions: Aobdia finds that several widely used measures of audit quality are predictive of Part I findings, consistent with these measures conveying audit quality. Specifically, unsigned discretionary accruals, the propensity to meet/beat the zero earnings threshold, and restatements positively predict the issuance of a Part I Finding, while audit fees negatively predict the issuance of a Part I Finding. Going concern opinions, on the other hand, are not associated with Part I Findings, consistent with opposite forces that may trigger an auditor to issue going concern opinions. Overall, the research shows that the collective predictive power of publicly available measures of audit quality on Part I findings is low, perhaps because most measures are a joint function of financial reporting and audit quality.​

The results of this paper provide some guidance to researchers about which measures of audit quality to use and suggest that some results in prior literature may need to be interpreted with caution.

Taking a different perspective, the results also suggest that an audit identified as deficient by the PCAOB is associated with worse reporting outcomes, including higher accruals and a higher probability of restatements. Thus, to a certain extent, these results also speak of the value, from a financial reporting standpoint, of a properly conducted audit.

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