Audit Deficiency and Auditor Workload: Evidence from PCAOB Triennially Inspected Firms

Purpose − This study examines the impact of workloads at public accounting firms on the likelihood of an audit deficiency being identified during a triennial inspection by the Public Company Accounting Oversight Board (PCAOB). Design/methodology/approach – Using the human resource information disclosed in PCAOB inspection reports, this study constructs two firm-specific workload measures: 1) the ratio of issuer clients to audit partners; and 2) the ratio of issuer clients to professional staff. Firm-level audit deficiency is measured at three levels of severity: 1) Do any of the audit engagements inspected by the PCAOB reveal an audit deficiency?; 2) Are any of the identified audit deficiencies directly related to the auditors’ failure to identify a departure from GAAP in the client’s financial statement?; and 3) Are any of the identified audit deficiencies associated with a significant adjustment or restatement in the client’s subsequent period financial statements? This study uses logistic regression to examine the association between audit deficiency and the workload of public accounting firms. Findings − The empirical evidence suggests that the workload of public accounting firms is positively associated with the likelihood of a deficient audit, auditor’s failure to identify client’s GAAP departure, and/or an audit deficiency resulting in a significant adjustment or even a restatement of the client’s financial statements in the subsequent period. Originality/value – This study is among the first to investigate the impact of firm workload on deficient audits.