Auditing the Auditors: Commitment versus Professional Judgement

Description

In this project, I propose a model to evaluate two approaches to audit the auditors: peer review and government inspection. On the one hand, government inspection is more committed to correcting audit deficiencies and has an ex-ante deterrence effect on audit firms. On the other hand, peer reviewers, with their professional knowledge, make more informed ex-post decisions about when to spend resources on identifying audit deficiencies. Thus, a trade-off between commitment and professional judgement emerges. The model applies to the controversial shift from AICPA peer review system to PCAOB inspection since 2002. The project will shed light on the conditions under which peer review is preferred to PCAOB inspection and vice versa, and will help to resolve the mixed empirical findings in the literature.