Higher Audit Quality and Higher Restatement Rates: An Examination of Big Four Auditee Restatements

56 Pages Posted: 29 Aug 2018 Last revised: 15 Nov 2021

See all articles by Stephen P. Rowe

Stephen P. Rowe

University of Arkansas

Padmakumar Sivadasan

Louisiana State University, Baton Rouge - Department of Accounting

Date Written: November 1, 2021

Abstract

Lower restatement rates are widely used as a proxy for higher audit quality. However, a restatement occurs when a misstated financial statement is corrected. While higher audit quality decreases the probability of a misstatement, it increases the probability that a misstatement is corrected. Higher audit quality can lead to higher restatement rates if the increase in correction probability dominates the decrease in misstatement probability. Using the PCAOB’s increased scrutiny of the Big Four auditors in the late 2000s as a natural experiment, we find that Big Four auditee restatement rates are higher than non-Big Four auditees in the higher scrutiny period, but not in the preceding or succeeding periods. Less material restatements drive the higher Big Four auditee restatement rate. However, we observe no deterioration in audit quality using non-misstatement measures. We offer suggestions on how researchers can more carefully evaluate the restatement results in specific research contexts.

Keywords: Restatements, Audit Quality, Big Four Auditors, Regulatory Scrutiny, PCAOB

Suggested Citation

Rowe, Stephen P. and Sivadasan, Padmakumar, Higher Audit Quality and Higher Restatement Rates: An Examination of Big Four Auditee Restatements (November 1, 2021). Available at SSRN: https://ssrn.com/abstract=3235756 or http://dx.doi.org/10.2139/ssrn.3235756

Stephen P. Rowe

University of Arkansas ( email )

Business Bldg. 450
Fayetteville, AR 72701
United States

Padmakumar Sivadasan (Contact Author)

Louisiana State University, Baton Rouge - Department of Accounting ( email )

E.J. Ourso College of Business Administration
2800 Business Education Complex
Baton Rouge, LA 70803
United States

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