Disclosure effects of the PCAOB part II reports

Purpose The purpose of this paper is to examine the effect of the PCAOB part II report disclosures on US triennially inspected audit firms’ deregistration decisions, the likelihood and the timing of audit firms’ dismissals and resignations. Design/methodology/approach The paper anchored on US regulations used 158 publicly available records of disclosed PCAOB part II reports from 2004 to 2012. Findings The number of the quality control deficiencies disclosed in the part II report affects US triennially inspected audit firms’ decisions to deregister from the PCAOB. Additionally, audit firms’ dismissals and resignations, both occur mostly within the first year after the part II report disclosure, although audit firms that subsequently deregister are more likely to be dismissed. Practical implications The paper provides support that the disclosure of the PCAOB part II inspection report motivates audit quality improvement. Social implications The PCAOB inspection and subsequent disclosure of the part II inspection report enhances audit quality, which in turn, enhances investor confidence in the accuracy and reliability of audited financial statements. Originality/value The paper provides insights about the effect of the disclosures of PCAOB part II report, over and above any benefits from the PCAOB part I report disclosures, which is the dominant focus of related literature.