Restatements: Do They Affect Auditor Reputation for Quality?

Posted: 27 Nov 2015

See all articles by Afshad J. Irani

Afshad J. Irani

Washington and Lee University

Stefanie L. Tate

University of Massachusetts at Lowell

Le Emily Xu

University of New Hampshire - Department of Accounting & Finance

Date Written: November 25, 2015

Abstract

We examine whether an auditor's involvement with a financial statement restatement has a negative effect on their reputation as evidenced by both clients' and the market's assessments of audit firm quality. Specifically, we investigate the effect of auditor involvement with restatements on the non-restating clients' likelihood to dismiss their auditors in the year subsequent to restatement and on non-restating clients' market adjusted returns (MARs) around the restatement announcement date. We also investigate whether the severity of the restatements has a differential effect on both variables. We find non-restating clients are more likely to dismiss auditors as the number of restatements the auditor was involved with increases and this likelihood increases with the number of restated items. In addition, non-restating clients' MARs are significantly negative around the restatement announcement date and are more negative with more severe restatements.

Keywords: financial restatements, audit quality, auditor reputation, auditor dismissal

Suggested Citation

Irani, Afshad Jeevan and Tate, Stefanie L. and Xu, Le Emily, Restatements: Do They Affect Auditor Reputation for Quality? (November 25, 2015). Accounting Horizons, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2695424

Afshad Jeevan Irani (Contact Author)

Washington and Lee University ( email )

204 West Washington Street
Lexington, VA 24450
United States
5404588628 (Phone)

Stefanie L. Tate

University of Massachusetts at Lowell ( email )

1 University Ave
Lowell, MA 01854
United States

Le Emily Xu

University of New Hampshire - Department of Accounting & Finance ( email )

Durham, NH 03824
United States
603-862-3318 (Phone)
603-862-3383 (Fax)

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