Does the PCAOB’s International Inspection Program Provide Spillover Audit Quality Benefits for Investors Abroad?

We examine indicators of audit quality (as measured by abnormal accruals, the likelihood of reporting a profit and the likelihood of issuing modified audit opinions) for a sample of companies from 56 countries with non-US auditors during 2002-2011. For US-listed companies with non-US auditors, we find the audit quality to be higher after the non-US auditor is PCAOB-inspected. Further, in a sample of non-USlisted foreign companies (i.e., foreign companies that are not US-listed), we find (a) the audit quality to be higher after the non-US auditor is PCAOB-inspected, (b) the audit quality to be higher when the non-US auditor is PCAOB-registered than otherwise, and (c) the audit quality effect to be stronger in countries that allow PCAOB inspections relative to countries that bar such inspections. Collectively, our findings suggest that the PCAOB’s international program has a positive externality (provides spillover audit quality benefits) abroad, i.e., the non-US auditor’s firm-level quality control improvements associated with the PCAOB’s international program benefits not only US investors in US-listed companies but also investors abroad in non-US-listed local companies audited by PCAOB-registered/inspected auditors abroad.