The Effects of Financial Restatements on Audit Fees of Non-Restating Office-Level Clients

Abstract

This study draws on both audit quality and trust theories to examine the effects of financial restatements on the auditor-client trust relationship, as evidenced by changes in audit fees of the auditor’s other non-restating office-level clients in the year following the restatement announcement. We find that trustor firms (i.e., non-restating firms with the same auditor [trustee] as restatement firms) pay significantly lower audit fees to the auditors especially when the auditors are one of the Big N firms. We also find a smaller drop in audit fees for firms in which the auditors’ tenure with the client is longer, consistent with the concept of benevolence in trust theory.

Keywords: Restatements, Audit quality, Audit fees, Trust theory, Tenure