2 Auditing the Auditors: Evidence on the PCAOB’s Inspections of Audit Firms*

This paper analyzes the merits of audit firm inspections conducted by the Public Company Accounting and Oversight Board (PCAOB). First, we provide evidence that audit clients do not value the PCAOB’s reports for signaling audit firm quality. Second, we find that the PCAOB plays a remedial role in terms of improving the quality of audit firms, particularly when its inspectors identify deficiencies. Third, after replicating prior empirical research that peer review reports are highly informative according to client perceptions, we isolate that their signaling value mainly stems from information that PCAOB inspectors do not publicly disclose in their reports. Collectively, our research implies that PCAOB inspections help to improve audit quality, although clients do not consider the inspectors ’ reports to be informative