A recent academic study lends support to the Public Company Accounting Oversight Board’s regulatory oversight of auditing firms, suggesting it gives investors greater confidence in companies, in turn leading to more capital available to businesses.
The study, by Professor Nemit Shroff of the Massachusetts Institute of Technology’s Sloan School of Management, found that companies issue additional capital amounting to 0.5 percent of assets and increase investment expenditures by 0.3 percent of assets as a result of additional auditor regulatory oversight.
In the study, he used data from the PCAOB international inspection program to test whether auditor regulatory oversight affects companies’ financing and investing behavior. Shroff examined a sample of non-U.S. companies that were audited by a PCAOB-inspected auditor. Using data from 35 countries from 2002 through 2014, he found that companies whose auditors are inspected by the PCAOB raised significantly more debt and equity capital after the publication of their audit firm’s PCAOB inspection report.
“Once a company’s auditor is inspected by the PCAOB and receives a clean report, the company is able to raise additional capital equal to 0.5 percent of its assets,” Shroff said in a statement. “This 0.5 percent is equal to approximately 10 percent of the average amount of external capital raised, which is extremely significant. While not all firms raise capital, when they do engage in this behavior, they raise 10 percent more if their auditor is PCAOB-inspected.”
On top of that, capital expenditures increase by 0.3 percent of assets after a PCAOB inspection of the company’s audit firm, equivalent to approximately 6 percent of average annual capital expenditures.
“This study shows that the PCAOB adds significant value to the financial reporting process,” said Shroff. “It opens up the black box of auditing, which benefits both investors and companies.”