Do PCAOB Inspections Improve Working Capital Accrual Reliability? Evidence from the PCAOB Annual versus Triennial Inspection Exposure

What is it about?

This study examines whether more frequent Company Accounting Oversight Board (PCAOB) inspection (i.e., annual PCAOB inspection vs. triennial PCAOB inspetion) helps to improve the reliability of working capital (WC) accruals. We assess the reliability of working capital accruals based on the capacity of WC accruals to predict future earnings and cash flows. We find that WC accruals of firms audited by auditors subject to annual PCAOB inspection exposure enhance earnings persistence more than and map future cash flow realization better than those by auditors subject to triennial PCAOB inspection exposure. Our results show that these findings are more evident for operating asset accruals than for operating liability accruals. We further find that accounts receivable accruals incrementally contribute to earnings persistence and cash flow predictability when firms are audited by auditors under annual PCAOB inspection program.

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