Would a Balanced PCAOB Inspection Approach Increase Auditors' Use of Innovative Audit Procedures?

ABSTRACT Prior research criticizes PCAOB inspection reports for focusing solely on audit deficiencies, arguing that this encourages auditors to pursue traditional procedures to demonstrate compliance with standards rather than procedures that maximize audit quality. We contribute to this debate by examining whether the PCAOB's approach discourages auditors from considering innovative audit procedures (that are potentially more effective), since they are, by definition, less standard. We compare the PCAOB's current inspection approach (which focuses on reporting audit deficiencies) to a balanced inspection approach that discloses examples of audit strengths as well as deficiencies discovered during inspections. We predict and find that when the risk of material misstatement (RMM) is moderate, a balanced inspection approach leads auditors to consider the potential effectiveness of innovative audit procedures to a greater extent, ultimately prioritizing more of them in audit plans. Our findings contribute to both research and practice by enhancing our understanding of ways to encourage audit innovation and ultimately improve overall audit quality.