“PCAOB Inspections, Accounting for Intangibles, and Resource Allocation for Innovation” by Mr. Jungbae Kim
Mr. Jungbae Kim
Ph.D. Candidate in Accounting
Stern School of Business
New York University
PCAOB inspections cite auditors for insufficient procedures in auditing the valuation of intangibles. I posit that auditors deemed deficient by the PCAOB subsequently conduct stricter procedures to remediate these deficiencies. I find that the clients of deficient auditors recognize larger and timelier impairments of intangibles, suggesting that auditors increase scrutiny about the valuation of intangibles in subsequent audits. This effect obtains only for valuation-related deficiencies and is stronger for the clients of auditors who receive such deficiencies repeatedly. Also, I predict and find that the clients of deficient auditors shift the allocation of resources away from external M&A deals-which yield recognizable intangibles whose valuation is subject to increased auditor scrutiny-and toward internal R&D expenditures. Overall, these results suggest that auditor scrutiny effectively alters the measurement of intangibles and thus affects the intra-firm resource allocation for innovation.