The Spillover Effect of PCAOB International Inspections on CPA Firm and Partner Audit Quality

Prior studies find that PCAOB inspection program improves audit quality for both US and foreign (i.e. non-US) auditors. It is also documented in past literature that PCAOB international inspections exhibit spillover effects over audit quality. That is, audit quality for non-US-listed foreign public companies improves after the initial PCAOB inspection. Using a sample drawn from Taiwan, where signatures of two audit engagement partners are required in audit reports, we further examine whether the positive externality of PCAOB international inspections is beneficial to only clients of audit partners signing US-listed companies or to all clients of the inspected foreign audit firm. Our results show that the audit quality for both audit firms and partners improves after PCAOB international inspections. Moreover, we find that firm-level specialists who provide high-quality audit service benefit less from PCAOB international inspections. However, for partner-level specialists, we find no moderating effect of specialization on the association between PCAOB international inspections and audit quality.