The Effect of National Inspection Regimes on Audit Quality

One of the key reforms aimed at improving audit quality has been the introduction of public oversight over the auditing profession by national public oversight bodies (POBs). The foundation of their strategy is inspections of audit firms. However, little is known about the impact of inspections on audit quality from an international perspective. We examine the effect of audit firm inspections by POBs on audit quality, and explore the association of inspection characteristics and audit quality. Applying a difference-in-difference design exploiting the commencement of inspections at different points in time for different countries to a large international sample over the period 2003 to 2012, we find that audit quality increases after inspections commence, and that this effect is stronger for Big 4 auditors. Further, the effect of inspections on audit quality is found to vary with inspection characteristics. Overall, our study contributes to our knowledge of the impact of inspections on audit quality.