The Impact of PCAOB-Type Regulations on Auditors Under Different Legal Systems.

This article analyzes the impact of Public Company Accounting Oversight Board (PCAOB)-type regulatory oversight and legal liability on audit quality and social surplus. We show the conditions under which regulatory oversight can improve audit quality and social surplus, as compared with the impact of legal systems. Moreover, we demonstrate that regulatory oversight is not likely to substitute effectively for a legal system. This is the first study that analyzes the possible effects of an audit regulator on auditors under different legal systems, and our results enhance understanding of the complex relationship between regulatory oversight, a legal system, and social surplus.

Auditor Choice and the Informativeness of 10-K Reports.

This study provides new evidence on the influential role of external auditors in enhancing the informativeness of form 10-K annual reports to shareholders. Specifically, we find that the client's choice of a Big 4 auditor (PwC, EY, KPMG, and Deloitte) versus a non-Big 4 auditor contributes to cross-sectional variations in 10-K disclosure volume. We also document that the benefit of enhanced disclosures provided by Big 4 auditors is more pronounced for audit clients with poorer accrual quality and those with higher information asymmetry. Furthermore, we introduce the portion of 10-K length unexplained by operating complexity and observable client characteristics as a new proxy for audit firm effort. Specifically, we find that abnormally long disclosures are associated with higher audit fees and longer audit report lag, which implies that an incremental level of audit effort can be inferred from the discretionary component of 10-K disclosures. As audit effort is costly, a greater volume of 10-K disclosures can be expected to be associated with an improvement in the quality of financial reporting. Overall, our findings show that auditors play more than a simple attestation role in the financial reporting process, and that the quality of financial reporting in a company's 10-K annual report is a joint product of the effort and decisions of both a company's managers and its auditors.