The effects of PCAOB inspections on auditor-client relationships

Andrew A. Acito, Chris E. Hogan, Richard D. Mergenthaler

Research output: Contribution to journalArticlepeer-review

37 Scopus citations


We investigate whether PCAOB-identified audit deficiencies lead to higher audit fees or turnover likelihood for clients of Big 4 auditors. To examine this, we identify areas of GAAP related to PCAOB deficiencies for each auditor. We then use textual analysis to identify how important the deficiencies are to clients to measure each client's exposure to deficient auditing. We find that this measure positively relates to audit fees and that this association is moderated by client bargaining power. Auditor turnover is also higher when deficiency exposure is high relative to what it would be for peer auditors, but we only observe this relation for smaller clients and do not find it is affected by client bargaining power. Finally, we find that companies switching Big 4 auditors tend to select an auditor resulting in lower deficiency exposure. These results have implications for understanding how PCAOB inspection reports affect the market for audit services.

Original languageEnglish (US)
Pages (from-to)1-35
Number of pages35
JournalAccounting Review
Issue number2
StatePublished - Mar 2018

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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