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This Audit Analytics blog highlights a recent study that suggests PCAOB regulation may be good for an auditor’s business:

In a recent paper titled “Regulatory Oversight and Auditor Market Share,” authors Daniel Aobdia and Nemit Shroff look into the PCAOB’s role in contributing to the perception of an auditor’s assurance value, and whether or not it has an effect on an auditor’s market share. If external stakeholders perceive the PCAOB inspection process to increase the quality of an inspected firm’s audit, then, they hypothesize, the demand for the inspected firm’s audits will increase.

Since all accounting firms that audit US publicly-traded companies are subject to PCAOB oversight, the study looked abroad to measure the effect of regulation on market share.  The study concluded that firms with positive PCAOB inspection reports realized bottom-line benefits:

PCAOB-inspected firms do indeed see an increase in market share relative to the firms that are not inspected by the PCAOB. According to the data, the average inspected auditor’s market share increased by 0.4 to 0.9 percentage points, or 3.5% to 6.4%. When looking at only auditors who received substantial negative criticism, however, they found that, true to their hypothesis, the auditors experienced no change in market share.

The study notes that the effect of a favorable PCAOB inspection was particularly significant in countries with higher levels of corruption.  Firms with good inspection outcomes saw an increase of 0.5 to 1.4% in high-corruption countries, while those in countries with a lower level of corruption only saw an increase of -0.4 to 0.4.

“Critical Audit Matters” Disclosure: Insurance Policy for Auditors? 

As Cooley’s Cydney Posner points out in this blog, accounting firms have not been big fans of the PCAOB’s proposal to make audit reports more informative through disclosure of “critical audit matters” – or “CAMs.”  Under the latest version of the proposal, critical audit matters would be defined to include any matter communicated to the audit committee that is material to the financial statements, and involves especially challenging, subjective, or complex auditor judgment.

According to a recent study, auditors may want to rethink their opposition to this proposed disclosure requirement:

It’s somewhat ironic to see the results of the study showing, among other things, that disclosure of CAMs could help protect auditors from legal exposure if a misstatement were subsequently discovered in the CAM area.

The study concluded that the “types of CAMs illustrated by the PCAOB are more likely to prompt a ‘disclaimer effect’ by warning users of the inherent subjectivity and complexity associated with auditing CAM areas. Specifically, we find that CAM disclosures lead to less confidence in the CAM area before a misstatement is revealed and less assessed auditor responsibility after a misstatement is revealed in the CAM area.”

Transcript: “Middle Market Deals – If I Had Only Known”

We have posted the transcript for our recent DealLawyers.com webcast: “Middle Market Deals: If I Had Only Known.”

– John Jenkins