The PCAOB’s Effect on Auditor Market Share

One of the most important aspects of the epochal Sarbanes-Oxley Act (SOX) of 2002 was the institution of the Public Company Accounting Oversight Board (PCAOB), whose purpose, in part, was to oversee the audits of public companies to promote and enforce high-quality audits. 

A number of studies have looked at the effects of the PCAOB on the audit industry. Overall, the research suggests that the PCAOB inspection process has improved audit quality. 

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. 

To research this question, they take a unique and clever approach. All US audit firms that give assurance to SEC registered public companies are subject to inspection by the PCAOB. That makes it difficult to measure the relative value of being a PCAOB-inspected firm in the US. However, a certain number of non-US audit firms audit SEC registered public companies, and are therefore subject to PCAOB inspection. So the authors look at PCAOB-inspected firms in non-US countries and compare them to the other firms in those countries that are not inspected by the PCAOB.

They find that the 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.

Interestingly, when they compared countries with higher corruption to those with lower corruption they found that, while both experienced an increase in market share, countries with higher levels of corruption saw an increase of 0.5 to 1.4 percentage points while countries with a lower level of corruption only saw an increase of -0.4 to 0.4.

In conclusion, Aobdia and Shroff found that the year after the disclosure of a firm’s PCAOB inspection, audit firms with positive inspection reports experienced a significant increase in market share. This increase was not found when auditors received negative inspection reports. Additionally, auditors in countries with higher levels of corruption experienced a significantly higher increase.