The Effect of Audit Firm Internal Inspections on Auditor Effort and Financial Reporting Quality

Daniel Aobdia, Reining C. Petacchi

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

We examine the effect of large audit firms' internal inspection programs, an important monitoring mechanism, on auditor effort and financial reporting quality. Internal inspections are often predictable, and engagement teams concentrate their effort on audits ultimately selected for inspections. The extra effort increases the likelihood of a favorable inspection rating. We find some evidence of improvement in financial reporting quality in the inspection year, suggesting that internal inspections are effective in deterring auditor shirking. Upon receiving a favorable rating, the engagement team reverts audit effort back to the preinspection level. However, if the rating is unfavorable, the team increases effort on future engagements of the client. This higher effort improves the client's financial reporting quality if the internal inspection program is not deemed deficient by the PCAOB. Collectively, the results highlight the importance of an effective internal inspection program in improving financial reporting quality.

Original languageEnglish (US)
Pages (from-to)1-29
Number of pages29
JournalAccounting Review
Volume98
Issue number5
DOIs
StatePublished - Sep 2023

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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