SUMMARY
The PCAOB has been inspecting firms for almost 20 years, yet there is little evidence regarding the effect of PCAOB inspections on auditor liability. We examine conditions under which a clean PCAOB inspection finding (at the engagement level) provides auditor liability protection for an audit subsequently called into question. Using source credibility theory, we predict and find that the defense introducing a clean PCAOB inspection finding for the litigated engagement reduces jurors’ negligence assessments by increasing the perceived credibility of the firm’s defense. We also find that, if the plaintiff introduces a PCAOB-issued control criticism (firm-wide level), jurors’ negligence assessments increase, regardless of whether a clean PCAOB inspection finding for the engagement is present. Collectively, results suggest that PCAOB inspection findings influence jurors’ negligence assessments. These findings have implications for audit firms, the PCAOB, and other public policy makers, as well as attorneys and triers of fact in audit litigation.
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