The challenges of the EU POB inspections beyond the sustenability of the ethical dilemmas

The aim of Public Oversight Bodies (POBs) is to improve firms’ audit quality through inspections of audit engagements. Nonetheless, the effectiveness of specific actions of POBs is yet to be documented in the literature. By using hand-collected data on the inspection characteristics from 14 European countries, I am able to provide novel evidence that disclosing the results of POB inspection affects audit quality. Specifically, after controlling for firm-level heterogeneity, I find that the number of national inspections and inspection characteristics is positively associated with the audit quality (proxied by abnormal accruals) of companies whose auditors are inspected by POBs. Overall, this research documents that the disclosure of annual reports is relevant for auditors and the effect of national inspections augments the audit quality.

Keywords: audit quality, financial reporting, risk disclosure, transparency.