Cheol Lee published in Accounting Horizons Journal
Mike Ilitch School of Business Associate Professor of Accounting Cheol Lee had a recent paper published in the Accounting Horizons Journal (AHJ). AHJ publishes papers that seek to bridge academic and professional audiences with articles that focus on accounting and that provide insights pertinent to the accounting profession. Lee’s paper, “Do PCAOB Inspections Improve Working Capital Accrual Reliability? Evidence from PCAOB Annual versus Triennial Inspection Exposure,” discusses the difference between the ability of working capital accruals to predict future earnings and cash flow versus registrants whose auditors are subject to annual Public Company Accounting Oversight Board (PCAOB).
Lee’s coauthors are Myung S Park from Virginia Commonwealth University and Jongeun Lee from Sungkyunkwan University.
In this study, we examine whether the ability of working capital (WC) accruals to predict future earnings and cash flows differs between registrants whose auditors are subject to annual Public Company Accounting Oversight Board (PCAOB) inspections and those whose auditors are subject to triennial PCAOB inspections. We find that WC accruals of clients audited by auditors subject to annual PCAOB inspections enhance earnings persistence more and map into future cash flow realizations better than those audited by auditors subject to triennial PCAOB inspections. These findings are stronger for operating asset accruals than for operating liability accruals. Furthermore, after PCAOB inspection reports are released, improvements in WC accruals reliability are more evident for clients audited by annually inspected auditors than for clients audited by triennially inspected auditors. Overall, our findings suggest that more frequent PCAOB inspections help to improve WC accrual reliability.