PCAOB Inspection of Audit Firms and Client Financial Statement Restatements

Ph.D. Candidate Yufei Wang of Accounting Department will be defending her dissertation titled, “PCAOB Inspection of Audit Firms and Client Financial Statement Restatements” on 08/27/2021.

The time and location of her dissertation defense is 10:00 AM – 11:30 AM, via Zoom.

Many thanks to Yufei’s dissertation committee: • Committee Chair: Hiu Lam Choy - Associate Professor - Drexel University • Committee Co-Chair: Anthony Curatola - Professor - Drexel University • Committee Member: Hsihui Chang - Professor- Drexel University • Committee Member: Johnny Lee - Associate Clinical Professor - Drexel University • Committee Member: Jeongsik Lee - Associate Professor - Drexel University

Abstract: This study examines whether auditors’ deficiencies identified in the Public Company Accounting Oversight Board (PCAOB) inspection reports are representative of auditors’ deficiencies and indicative of misstatements in their clients’ financial reports. I examine whether the specific deficiencies raised in the PCAOB inspection reports relates to the clients’ specific accounting misstatements in the restatements. I test two accounting areas that are either being the largest cause of restatements (revenue) or more likely to have disagreements between auditors and the PCAOB’s inspectors (goodwill) in terms of the nature of the accounts. The results show that clients of auditors that receive revenue-related deficiencies in the PCAOB inspection reports are likely to restate revenue-related accounting issues, whereas there is no such association between goodwill-related deficiencies and goodwill-related restatements. Furthermore, I filter out the auditor’s clients based on their exposure to the audit deficiencies and find that clients with higher exposure to revenue- and goodwill-related deficiencies are more likely to restate revenue- and goodwill-related accounting issues, respectively. Additionally, goodwill-related audit deficiencies that are departures from GAAP are more likely to be associated with goodwill-related restatements than non-GAAP goodwill deficiencies, whereas revenue-related deficiencies do not differ between GAAP and non-GAAP deficiencies. The findings show that the relations between audit deficiencies and restatements vary among different accounting areas and such relations are affected by the severity of the deficiency and the client’s exposure of the deficiency.