RQ: Does the threat of PCAOB inspection affect auditor behavior, and/or financial statement quality.

Data: Every six months the PCAOB publishes a list of jurisdictions in which they have inspected at least 1 auditor during the period. A went ahead and collected this data and included it in the table below. The list starts with 25 jurisdictions, and grew to 38 by the end of 2011.
Mar-09 Argentina Australia Bermuda Brazil Canada Chile Colombia Greece Hong Kong India Indonesia Ireland Israel Japan Kazakhstan Dec-09 Argentina Australia Belize Bermuda Bolivia Brazil Canada Cayman Islands Chile Colombia Greece Hong Kong India Indonesia Ireland Israel Japan Kazakhstan Republic of Korea Mexico New Zealand Norway Panama Papua New Guinea Peru Philippines Russian Federation Singapore South Africa Taiwan Jun-10 Argentina Australia Belize Bermuda Bolivia Brazil Canada Cayman Islands Chile Colombia Greece Hong Kong India Indonesia Ireland Israel Japan Kazakhstan Republic of Korea Malaysia Mexico New Zealand Norway Panama Papua New Guinea Peru Philippines Russian Federation Singapore South Africa Taiwan Dec-10 Argentina Australia Belize Bermuda Bolivia Brazil Canada Cayman Islands Chile Colombia Greece Hong Kong India Indonesia Ireland Israel Japan Kazakhstan Republic of Korea Malaysia Mexico New Zealand Norway Panama Papua New Guinea Peru Philippines Russian Federation Singapore South Africa Taiwan Jun-11 Argentina Australia Belize Bermuda Bolivia Brazil Canada Cayman Islands Chile Colombia Greece Hong Kong India Indonesia Ireland Israel Japan Kazakhstan Republic of Korea Malaysia Mexico New Zealand Norway Panama Papua New Guinea Peru Philippines Russian Federation Singapore South Africa Taiwan Thailand Ukraine United Arab Emirates United Kingdom Dec-11 Argentina Australia Belize Bermuda Bolivia Brazil Canada Cayman Islands Chile Colombia Germany Greece* Hong Kong* India Indonesia Ireland* Israel Japan Kazakhstan Republic of Korea Malaysia Mexico New Zealand Norway Panama Papua New Guinea Peru Philippines Russian Federation Singapore South Africa Switzerland Taiwan Thailand Turkey Ukraine United Arab Emirates United Kingdom

Mexico New Zealand Norway Panama Peru

Russian Federation Singapore South Africa Taiwan

United Kingdom

Ukraine United Arab Emirates United Kingdom

Ukraine United Arab Emirates United Kingdom

Ukraine United Arab Emirates United Kingdom

Research Design: For each period in which a new jurisdiction is added to the list, we could do a difference in difference test to find the effect of the PCAOBs presence. Presumably, the threat of inspection w ill change the behavior of auditors, and changes in auditor behavior may bleed through to financial statement quality. Because the PCAOB inspections did not start in all countries at the same time, using the international setting should provide a strong basis for measuring the PCAOB effect. Using Germany as an example, I have done a quick sketch up of what I am thinking below. We could repeat this for each county that undergoes a change in PCAOB inspection privileges.
Difference in Difference Design Dec-10 Germany Matched Country with no Change in PCAOB Inspection Privileges Quality Measure Quality Measure Difference in Quality Dec-11 Quality Measure Quality Measure Difference in Quality Difference in Quality Difference in Quality Difference in Difference