Auditing the Auditors and Stock Crashes : International Evidence

We investigate the impact of the initiations of national audit inspection programs on firm-specific stock crash risk in 38 countries worldwide. The staggered commencement of the inspection regimes in different countries allows us to identify the causal effect of audit quality on crash risk. We find a significant decrease (32.39%) in a firm's crash risk subsequent to the initiations of audit inspections. This negative effect is stronger for auditors with smaller size, limited industry expertise, and longer tenure. We further explore the mechanisms through which audit inspections affect crash risk. We find that the effect of inspection programs on crash risk is driven by client firms facing higher ex ante inspection risk, as well as client firms in which auditors play an important role in monitoring managers