We study the fees paid by distant private clients of Big 4 audit offices in the U.K. Focusing on clients located over 100 km from the auditing office when a closer office of the same audit firm is also available, we find a negative association between distant clients and audit fees. Larger discounts are related to offices with fewer clients, located in different U.K. nations, as well as to higher-performing offices, in line with results consistent with supply-side factors, where pricing decisions reflect efforts to optimize office capacity and expand client bases. Moreover, fee discounts for distant clients are concentrated among mid-sized client firms. Distant clients also exhibit higher within-GAAP discretionary accruals, but we find no relation with egregious misreporting. Our findings offer new insights into audit market dynamics in the underexplored segment of unlisted clients and highlight the role of capacity utilization and fixed-cost management in shaping audit pricing.
Professional cynicism in auditing (PCA) is a negative attitude toward the audit profession that reflects doubt about the integrity of the profession, including auditing work's orientation toward serving the public's interests and value in protecting those interests. Across a series of surveys and experiments, we find evidence of PCA among staff and senior auditors, and we find that auditors who are cynical are less willing to take effortful actions to increase audit quality, such as pushing back on client assertions, raising potential issues to supervisors, and making audit procedures more effective. Our results shed light on why auditors are prone to inaction when action is needed and provide initial evidence of how PCA affects audit quality. Thus, our study motivates future research examining the antecedents of PCA and interventions that can curb its effects.
SUMMARY The PCAOB oversees the audits of public companies and the audits of broker-dealers. The creation of the PCAOB has sparked several streams of research. We systematically review and synthesize the academic literature on PCAOB oversight published between 2005 and April 2026. Our synthesis focuses on the impact of PCAOB oversight on audit quality, the audit profession, and other relevant stakeholders. We structure our synthesis along three oversight responsibilities of the PCAOB: registration of public company audit firms; inspection of the work product of auditors; and enforcement of standards and rules. We leave PCAOB standard setting to future work. In total, 76 studies meet the scope requirements for inclusion in the synthesis. Although all activities of PCAOB oversight have been subject to academic inquiry, the inspection program has received the bulk of academic attention. We conclude our synthesis by discussing key takeaways from the research and opportunities for future research. JEL Classifications: G18; M40; M42; M48.
Prior literature documents differential audit outcomes associated with an auditor's level of industry specialization. However, archival studies have not prominently examined how specialist auditors achieve such outcomes. Our study develops an industry-specific bankruptcy risk score to serve as an archival proxy for industry-specific information that specialist auditors may utilize. Among distressed clients of firms annually inspected by the PCAOB, we find evidence of a positive association between industry-specific bankruptcy risk and the auditor's propensity to issue a going concern opinion. We find that this sensitivity to industry-specific bankruptcy risk increases with the auditor's level of industry specialization. Furthermore, we find that industry specialist auditors achieve lower Type I error rates, although the association between specialization and opinion accuracy is only robust when industry-specific bankruptcy risk is low. Our findings contribute to the bankruptcy prediction, going concern, and industry specialization literature and should be of interest to regulators, auditors, and issuers.
Auditing standards play an important role in shaping audit practices. Drawing on prior academic , practitioner auditing literature and the process-oriented legitimacy typology from financial reporting research, we develop an input-process-output framework of auditing standard setting. We refine this framework using interview data from 28 highly experienced auditing standard setters. Our results shed light on how auditing standard setters' characteristics and perspectives (inputs), as well as their activities, decisions, challenges , interactions with key financial reporting stakeholders (processes), influence the development and revision of auditing standards (outputs). We also provide insights into how some inputs and processes are aimed at specialIntscript producing auditing standards with characteristics that standard setters consider important and specialIntscript contributing to the legitimacy of auditing standards and the standard setting boards.
We examine whether external auditor behavior is sensitive to shifts in corporate tax enforcement. Using a regression discontinuity design that exploits a Chinese tax reform that assigns companies to two enforcement regimes based on registration dates, we find that auditors exert less effort-evident in lower audit fees-when clients are monitored by the more stringent tax authority, although their financial reporting quality improves, evident in a lower incidence of accounting and tax-related restatements. We also document that clients undergoing stricter tax enforcement have shorter audit report lags and are assigned less experienced partners. Collectively, the results are consistent with clients responding to tougher tax enforcement by improving compliance, which, in turn, reduces perceived audit risk and enables auditors to perform their work more efficiently. Surveys of auditors corroborate these inferences. Our evidence implies that tougher tax enforcement engenders a positive externality by improving audit efficiency without sacrificing reporting quality.
This study examines whether analysts' earnings and cash flow forecasts improve the accuracy of auditors' going-concern opinions (GCOs). Using a propensity score matched sample, we compare GCO accuracy for financially distressed firms with earnings forecasts only, those with both earnings and cash flow forecasts, and a control group without forecasts. We find that earnings forecasts significantly reduce Type I errors, whereas cash flow forecasts provide additional accuracy gains. For Type II errors, the results are mixed and vary with model specifications. Accuracy improvements are stronger when forecasts are more frequent or exhibit greater dispersion, highlighting their informativeness. Auditors are also more likely to issue GCOs when analysts predict negative or declining earnings and cash flows for the following year, consistent with analysts' role in evaluating future financial viability. These findings demonstrate that analysts' forward-looking forecasts complement firm-specific information, enhancing auditors' assessment of financial viability and improving the precision of GCOs.
This study investigates whether audit committees voluntarily increase disclosure of their audit oversight activities to manage their legitimacy and, if so, whether such disclosure strategy is effective. Voluntary increases in audit committee disclosures would suggest that a regulatory mandate to require expanded audit committee reports may not be necessary. Analyzing approximately 26,000 U.S. audit committee report disclosures between 2005 and 2017, we find that audit committees voluntarily increase disclosure of their audit oversight activities following (1) the SEC's 2015 Concept Release which encouraged greater audit committee disclosure and (2) a company's restatement announcement. However, we find that increased audit committee disclosure only partially mitigates the negative restatement impact on shareholder satisfaction with the audit committee. We also provide some evidence that voluntary disclosure increases are concentrated among larger companies. Overall, our findings suggest that, although a regulatory mandate may not be necessary, audit committees may benefit from enhanced disclosure guidance.
Prior research shows that auditors exercising appropriate professional skepticism receive lower performance evaluations when they fail to identify misstatements compared with when they identify misstatements-recognized as an outcome effect. This robust finding has led to two common inferences, which we empirically examine: (1) supervisors penalize "fruitless skepticism" (Experiment 1), and (2) audit evaluation systems discourage professional skepticism, compromising audit quality (Experiment 2). In Experiment 1, we demonstrate that evaluation differences stem predominantly from positive reactions to misstatement identification. We find insufficient evidence to support negative reactions to nonidentification. In Experiment 2, we demonstrate that timely performance evaluations are critical: when auditors receive prompt feedback, they maintain appropriate professional skepticism in subsequent tasks, even when the initial task resulted in fruitless skepticism. Although our results confirm the evaluation gap documented in prior research, they reveal that outcome effects manifest differently than previously assumed and do not necessarily threaten audit quality.
We investigate when companies copy auditors on SEC comment letter correspondence and whether copying the auditor affects comment letter resolution. We find that companies are more likely to copy the auditor when there is a need for the auditor's expertise (i.e., the SEC's comment letter references an accounting topic). Copying the auditor is associated with quicker company responses to the SEC, and copying a more experienced auditor is associated with quicker SEC responses. Copying more experienced auditors is also associated with a greater (lower) likelihood that the comment letter is resolved through a revision (restatement). Finally, with respect to potential mechanisms, copying the auditor is associated with clearer company responses, more references to accounting authoritative guidance, more references to previous phone calls with the SEC, fewer requests for extensions, and higher audit fees. Overall, our results suggest that companies benefit from copying the auditor in comment letter responses.
The audit pricing literature documents industry-specific pricing effects, focusing on the largest auditors with inter-firm (across firms) advantages developed through market dominance. However, prior studies have distinguished between auditors' inter-firm and intra-firm (within-firm) advantages within an industry. We examine how auditors' relative industry focus serves as an intra-firm advantage, distinct from market share and other portfolio measures. To capture this, we use FOCUS, a measure of auditors' relative production efficiencies within an industry. Using 20,530 observations of U.S.-listed firms from 2009 to 2019, we find consistent evidence that relative industry focus is associated with lower audit fees. This effect is distinct from auditor size and scale measures, robust to alternative specifications, and is not associated with lower audit quality. These findings demonstrate that auditors of all sizes can develop industry-specific comparative advantages, addressing the limited research on smaller auditors' industry-specific competencies.
: Using data from Belgian audit firm human capital disclosures that provide direct measures of employee turnover, voluntary departures, and dismissals, we examine the association between audit firm-level employee turnover and audit quality. First, we confirm that turnover is negatively associated with audit quality in a setting dominated by private firms, corroborating recent U.S. evidence from listed companies. Second, we find that voluntary and abnormal turnover are associated with lower audit quality, whereas dismissals are not. Third, the negative association between turnover and audit quality is more pronounced in firms with lower partner staffing leverage and lower employee replacement. Our study contributes to research and practice by demonstrating that (1) the negative association between turnover and audit quality generalizes to private company audits, (2) voluntary and abnormal turnover are associated with lower audit quality, and (3) firms can mitigate employee turnover through higher staffing leverage and higher employee replacement rates.
We examine whether grammatical errors (GEs) in financial reports provide a timely signal of the reliability of firms' financial information. Consistent with the notion that GEs capture the time, effort, and resources devoted to financial filings, we find that GEs are more common when firms have less time to prepare their financial reports and, importantly, that they are positively associated with the likelihood of a future restatement and the discovery of an internal control weakness. We also document a positive association between GEs and auditor effort. Collectively, our findings suggest that GEs provide a credible signal of financial reporting quality and audit engagement risk.
Based on the double-entry bookkeeping mechanism, each transaction is recorded in at least two ledger accounts, with either debit or another credit. Journal entry data, in the context of accounting, contains a rich network of information that can be effectively translated into a graph. This study explores how to use graph neural networks to learn graph representations from journal entry data and to systematically understand the intricate patterns and connections inherent in journal entries at the transaction level. The real-world application results demonstrate that the unsupervised graph neural network framework of journal entry data offers a promising methodology for detecting fraud and error in auditing work.
This paper examines whether high-reputation auditors mitigate costs of tax avoidance in private firms with concentrated ownership. Using detailed data on Norwegian firms from 2000 to 2016, we find that ownership concentration is associated with lower tax avoidance-consistent with controlling shareholders avoiding aggressive tax strategies due to concerns about minority investor perceptions or heightened risk aversion. However, this effect is significantly attenuated when firms engage a Big 4 auditor. The result holds across alternative tax avoidance measures, ownership proxies, firm types and persists under various identification strategies, including matching, auditor switches, and audit-partner mobility. We further show that the effect holds for firms above and below their estimated tax-target and is robust across the tax avoidance distribution. Finally, we find similar effects for industry specialist auditors, suggesting that both brand and domain-specific expertise serve a reputational function. These findings highlight the governance role of external auditors in private firms.
Auditors must keep pace with technological developments because they lead to increasingly voluminous, heterogeneous, and fast accumulating data. Advanced audit data analytics (ADA) has emerged as a new type of analytics that has the potential to overcome the challenges that auditors face in the current era of Big Data; however, it has not yet been widely adopted by the auditing profession. This study focuses on these analytics through the means of a structured review and synthesis of the academic literature, based on the unified theory of acceptance and use of technology. It provides insights into data analysis techniques that are described in academic literature and investigates what kinds of challenges auditors encounter when they intend to use advanced ADA and why this is the case. We identify several factors that seem to be particularly important, discuss the potential implications for different stakeholder groups, and suggest potential pathways for future research. JEL Classifications: M41.
Large audit firms operate under decentralized structures that grant autonomy to local offices but introduce moral hazard and knowledge constraint issues. This study investigates whether centralized governance by the national office mitigates these issues. Specifically, we test whether variation in the costs of national office monitoring and knowledge management affects local office audit quality. We proxy for monitoring costs using geographic distance and the introduction of direct airline routes and for knowledge management costs using time zone differences. Using audit engagement data from the eight largest audit firms between 2005 and 2019, we find that lower national office governance costs are associated with a reduced likelihood of client restatements. These benefits are more pronounced for smaller offices and those farther from large offices. Exploiting the staggered introduction of direct airline routes, we show that reduced travel time improves audit quality, especially when national offices face heightened time and resource constraints.
We investigate how audit partners of nonglobal network firms (i.e., firms other than the "Global 7") engage in institutional work to influence the use of technology-based audit tools (TBATs). Using an experiential survey, we gather partners' perceptions of factors that influence and impede TBATs and their efforts to shape TBAT practices. We find that partners' engagement-level institutional work centers on team and client collaboration for effective and efficient TBAT integration. Partners' firm-level work focuses on creating and maintaining a culture of TBAT utilization, including encouraging innovation, valorizing usage, supporting training and resources, and embedding use in firm practices. Partners also engage with various external parties to share knowledge and to help influence TBAT design and implementation. Competitive pressures and expectations, efficacy gains, and ambiguous guidance largely motivate these internal and external efforts. This study extends research on TBATs and documents how audit partners actively influence TBATs in practice.
Audit committees (ACs) are responsible for appointing external auditors but are not required to (and often do not) provide disclosures about how they accomplish this duty, and investors are concerned about this opacity. We hand-collect data on disclosures of factors considered by the AC in reappointing auditors. We find that disclosure tempers shareholder dissatisfaction with the AC's chosen auditor, particularly when there are concerns about impaired auditor independence. Disclosure mitigates AC career concerns, especially after financial reporting failures, and disclosure is associated with high audit quality. Additionally, we find that AC attributes indicating AC effectiveness do not alter the mitigating effect of disclosure on shareholder dissatisfaction and AC career concerns, but the positive effect of disclosure on audit quality is mainly evident when ACs have high attribute effectiveness. Evidence on the legitimacy implications of auditor reappointment disclosure is informative for constituents concerned about the effectiveness and transparency of the AC.
Existing auditing standards require auditors to detect material illegal acts that directly affect financial statements, but not those with indirect impacts, as these involve operational issues outside their expertise. The Public Company Accounting Oversight Board has proposed amending these standards because the distinction confuses investors, who increasingly expect auditors to identify and report indirect-effect illegal acts. Using regulatory fines to proxy for these acts, we find that the auditors' market share growth rate remains unaffected by fines on their clients. However, auditors face a reduced market share growth rate if they continue serving fined clients. An explanation for our finding is that, consistent with extant standards, market participants do not expect auditors to be aware of their clients' indirect-effect illegal acts and do not penalize them for associating with guilty clients. Yet, once a fine is public, the market penalizes auditors who do not distance themselves from the fined clients.
