Audit regulation is primarily focused on enhancing the quality of external financial reporting and protecting the interests of external stakeholders. However, there is growing recognition that such regulation can also have spillover effects on the internal information environment of organizations, benefiting managers in their decision-making processes. A recent study by Brant Christensen, Lijun (Gillian) Lei, Sydney Qing Shu, and Wayne Thomas (2023) investigates the impact of the Public Company Accounting Oversight Board’s (PCAOB) international inspection program on management forecast accuracy. The study provides valuable insights into the relationship between audit regulation and the quality of internal information used by managers.
The study aims to examine whether the initiation of the PCAOB’s inspection program, which increases auditor scrutiny, leads to improvements in management forecast accuracy. By focusing on the internal information environment, the study sheds light on how audit regulation can benefit managers, in addition to its intended effects on external reporting quality.
The researchers conducted an empirical analysis using data from firms in 13 countries between 2000 and 2016. They examined the changes in management forecast accuracy following the introduction of PCAOB inspection access in a country. The study found a significant improvement in management forecast accuracy after PCAOB inspection access, suggesting that managers have access to better information.
Key Implications from the study are the following:
- Improved Internal Information: The study provides evidence that audit regulation, through increased auditor scrutiny, enhances the internal information environment of organizations. This improvement in information quality enables managers to make more accurate forecasts, leading to better decision-making.
- Benefits for Managers: The findings highlight the positive spillover effects of audit regulation on managers. By improving the underlying information used by managers, regulation enhances their ability to understand complex issues, estimate future performance, improve internal controls, and identify and manage risks effectively.
- Mechanism of Improvement: The study identifies the audit-induced improvement in the internal information environment as the mechanism underlying the observed increase in management forecast accuracy. The improved information is distinct from the effects of audit regulation on external reporting quality, demonstrating that it provides additional value to managers.
- International Perspective: The study contributes to the literature by examining the impact of audit regulation on voluntary disclosure practices, specifically management forecasts, in a cross-country setting. The results indicate that PCAOB international inspections benefit U.S.-listed foreign firms by encouraging more accurate and frequent management forecasts.
- Future Research Opportunities: The study opens avenues for further research to understand the specific processes and mechanisms through which regulation-induced auditor effort benefits managers. Experimental research can delve into the link between audits and the information used by managers and explore how higher-quality audits reduce managers‘ uncertainty, thereby motivating them to issue forecasts.
The study by Christensen et al. (2023) provides valuable insights into the impact of audit regulation on the quality of internal information used by managers. The findings suggest that PCAOB inspection access leads to improvements in management forecast accuracy, indicating that audit regulation benefits managers in addition to external stakeholders. This research highlights the importance of considering the spillover effects of audit regulation and underscores the role of auditors in improving the overall information environment within organizations. By enhancing internal information quality, audit regulation contributes to more informed decision-making by managers and ultimately supports organizational success.