Quality control system criticism raised by the Public Company Accounting Oversight Board in non-US jurisdictions and earnings quality of non-cross-listed clients

This study investigates the association between Public Company Accounting Oversight Board (PCAOB) inspection-related criticisms of an accounting firm's system of quality control and earnings quality of non-cross-listed clients in non-US jurisdictions. We also assess whether this association is different in subsamples where a local independent inspection regime is present compared with jurisdictions without such a regime. We use a difference-in-difference design to assess changes in accruals quality in pre- and post-inspection periods. Our sample includes 2006-2011 data on first-time, international PCAOB inspections of Big 4 accounting firms in 19 countries. Our findings indicate that earnings quality improvement of non-cross-listed clients after international PCAOB inspections is higher for inspections with (versus without) PCAOB-detected deficiencies of the system of quality control. We also find that this improvement occurs in countries with independent oversight of the audit profession.