Audit Firm Tenure and Financial Restatements: An Analysis of Industry Specialization and Fee Effects

Posted: 14 Jul 2008

See all articles by Jonathan D. Stanley

Jonathan D. Stanley

Auburn University - School of Accountancy

Todd DeZoort

University of Alabama - Culverhouse School of Accountancy

Date Written: March 1, 2007

Abstract

This study investigates the relation between audit firm tenure and clients' financial restatements. Specifically, we extend the audit tenure literature by assessing restatement-based reporting failures using dimensions of auditor expertise and independence previously assumed to underlie short and long audit tenure problems. Short tenure expertise and independence effects are hypothesized using audit firm industry specialization and audit fees as proxies. Long tenure independence effects are hypothesized using nonaudit fees as a proxy. Using matched-sample logistic regression and 382 companies with and without financial restatements during 2000-2004, the results support prior findings by indicating a negative relation between the length of the auditor-client relationship and the likelihood of restatement. For short tenure engagements, we find that auditor industry specialization and audit fees are negatively related to the likelihood of restatement. This result is consistent with concerns about reduced audit quality due to a lack of client-specific knowledge and low audit fees on new audit engagements. Alternatively, the long tenure results indicate an insignificant relation between nonaudit fees and the likelihood of restatement. This finding contradicts independence concerns about nonaudit fees paid to entrenched auditors.

Keywords: Audit tenure, Financial restatements, Industry specialization, Audit fees, Nonaudit fees

Suggested Citation

Stanley, Jonathan D. and DeZoort, Todd, Audit Firm Tenure and Financial Restatements: An Analysis of Industry Specialization and Fee Effects (March 1, 2007). Journal of Accounting and Public Policy, Vol. 26, No. 2, 2007, Available at SSRN: https://ssrn.com/abstract=1159786

Jonathan D. Stanley (Contact Author)

Auburn University - School of Accountancy ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

Todd DeZoort

University of Alabama - Culverhouse School of Accountancy ( email )

Tuscaloosa, AL 35487
United States

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