Evidence on the Association between Financial Restatements and Auditor Resignations
44 Pages Posted: 6 Mar 2012 Last revised: 13 Nov 2012
Date Written: March 1, 2012
Financial restatements have significant implications for auditor-client relationships. We estimate that a restatement increases the odds of an auditor resignation dramatically. Restatements involving fraud, reversing profit to loss and those disclosed in press releases appear to drive the increased resignation likelihood. Further, companies with relatively severe restatements are more likely to hire smaller auditors following a resignation. Collectively, these results are consistent with auditors interpreting restatements as an indication of increased client risk.
Keywords: restatement, auditor resignation, new auditor type
JEL Classification: M41, M42, G34
Suggested Citation: Suggested Citation