How PCAOB Inspections and firms' Internal Quality Reviews influence auditor effort and fees

What is it about?

We find that when auditors believe that their audit will will be inspected by the PCAOB or subject to their firm's internal quality review (IQR) that auditors perceived overall engagement risk assessments, even after controlling for traditional audit risk factors, consistent with auditors viewing inspection risk as incremental to these risk factors. Further, we find that auditors increase both audit effort and fees—with a more pronounced reaction to PCAOB inspections than IQRs.

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Why is it important?

While auditors may perceive that PCAOB inspections and IQRs do not influence effort or fees, both likely cause auditors, perhaps unconsciously, to increase effort and fees. To the extent to which auditors are able (or try) to anticipate specific audits that will be subject to an inspection or an IQR and, in turn, modify audit plans, the ensuing inspection/review may not capture a true sample of a firm’s audits (i.e., auditors might be ‘‘over-auditing’’ certain areas for certain clients).