Do PCAOB Inspections Improve the Accuracy of Accounting Estimates?

• Published in: Journal of accounting research Vol. 59; no. 1; pp. 331 - 370
• Main Authors: STUBER, SARAH B., HOGAN, CHRIS E.
• Format: Journal Article
• Language: English
• Published: Chicago Wiley Subscription Services, Inc 01.03.2021; Blackwell Publishing Ltd
• Subjects: Accounting; Accuracy; allowance for loan losses; Audit engagements; auditor; Audits; Business schools; Efficacy; Estimates; Inspections; PCAOB; regulation; Risk management
• ISSN: 0021-8456; 1475-679X
• DOI: 10.1111/1475-679X.12339

ABSTRACT Despite issuing extensive guidance related to the evaluation of accounting estimates, the PCAOB continues to identify deficiencies related to the audit of estimates through their inspections process. We examine whether PCAOB inspections lead to more accurate audited accounting estimates, defined as those that more closely match economic reality, by examining a significant estimate within the banking industry. We find that in contrast with the PCAOB's goal of more accurate and unbiased estimates, allowance for loan losses (ALL) estimates become less accurate and more conservative with higher levels of ALL‐related inspection findings for public company audits. We find no evidence of auditor response to PCAOB inspection findings for private‐company audits, which are not subject to PCAOB inspection. Overall, our findings cast doubt on the efficacy of PCAOB inspections in improving estimate accuracy and suggest that firms are managing inspection risk to the potential detriment of audit quality.