Watching the Watchdogs: An Examination of the PCAOB Quality Control Inspection Reports on Triennially Inspected Audit Firms and the AICPA Peer Review Reports

While several studies have examined the PCAOB inspection reports (part I) and/or AICPA peer review reports (see Lennox and Pittman 2010, Casterella et al. 2009; Anatharaman 2012; Hillary and Lennox 2005), studies examining deficiencies in part II – the quality control section of the PCAOB report are rare. This study examines the weaknesses identified in the quality control section (that have been made public by the PCAOB after a lack of progress within 12 months by the firms) and compares them to the quality control weaknesses identified in AICPA peer review reports – an apple to apple comparison. This paper reports on an analysis of 106 PCAOB Quality Control Inspection (PCAOB QC) reports for triennially inspected firms and 2,355 AICPA peer review reports for firms with less than 100 SEC audit clients. Both univariate and multivariate tests indicate that PCAOB QC reports disclose a significantly higher number of engagement performance (EP) deficiencies than peer review reports. Statistical tests also indicate that the PCAOB QC reports disclose a significantly higher number of independence weaknesses than peer review reports. Results are mixed for monitoring deficiencies. These results indicate that the PCAOB inspectors are more thorough and tougher than peer reviewers and may be providing ex ante incentives for auditors to improve audit quality (see DeFond 2010). Multiple regression results indicate that the engagement performance deficiencies are positively and significantly associated with the number of clients per partner. The higher the partner workload the higher is the number of EP weaknesses identified. The number of professional staff is negatively related to the number of deficiencies. This study incrementally contributes to the discussion on the PCAOB QC inspection reports and has implications for auditors, regulators, and academics