Does the PCAOB International Inspection Access Improve Voluntary Disclosure? Evidence from Management Forecast Accuracy

We investigate the change in management forecast accuracy around the Public Company Accounting Oversight Board’s (PCAOB) initial access to inspect auditors of U.S.-listed foreign firms. We expect that inspection access will increase auditors’ scrutiny of their clients’ financial reports and thereby improve the underlying information set used by managers to make forecasts. Consistent with these expectations, we find that managers make more accurate earnings forecasts following PCAOB inspection access. Furthermore, the improvement in forecast accuracy is more pronounced for firms whose reported earnings appear to have been affected most by inspection access (i.e., those with reduced abnormal accruals, corrected internal control material weaknesses, and non-fraud restatements). While prior research provides evidence that more stringent audits improve decisions of external stakeholders (e.g., investors and creditors), our study provides additional evidence on the decisions of another important stakeholder—managers.