Do Financial Restatements Lead to Auditor Changes?

2012 ◽  
Vol 32 (2) ◽  
pp. 119-145 ◽  
Author(s):  
Vivek Mande ◽  
Myungsoo Son
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Positive Association ◽  
Data Availability ◽  
Market Returns ◽  
Stock Market Returns ◽  
Financial Restatement ◽  
Financial Restatements ◽  
Reputational Capital

SUMMARY: This paper examines whether financial restatements are associated with subsequent auditor changes. A financial restatement represents a breakdown in a company's financial reporting, but, importantly, also of its audit. We argue that in response to pressure from capital markets, restating firms will dismiss their auditors to increase audit quality and restore reputational capital lost when the restatements are announced to the investing public. Using a large sample of restatements and auditor changes we find that, consistent with our hypothesis, the likelihood of auditor-client realignments increases after firms announce restatements. As expected, we also find that the positive association between restatements and auditor turnovers is more pronounced when restatements are more severe and the quality of corporate governance is high. Finally, we find that stock market returns surrounding auditor changes increase as the severity of restatements increases. The last result supports the idea that stock markets have a positive view of auditor changes following restatements. Data Availability: Data are publicly available from sources identified in the paper.

scholarly journals Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

2018 ◽  
Vol 94 (2) ◽  
pp. 53-81 ◽  
Author(s):  
Lori Shefchik Bhaskar ◽  
Joseph H. Schroeder ◽  
Marcy L. Shepardson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Auditor Judgment ◽  
Public Company ◽  
Better Than

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.

scholarly journals The association between mandatory financial restatements and the turnover of firm executives

2008 ◽  
Vol 6 (1-4) ◽  
pp. 467-474
Author(s):  
Jo Ting Wei
Keyword(s):  
Developing Countries ◽  
Financial Reporting ◽  
Positive Relationship ◽  
Positive Association ◽  
Past Research ◽  
Developed Countries ◽  
Normal Operation ◽  
Financial Restatement ◽  
Financial Restatements ◽  
The Relationship

Prior studies have examined the relationship between financial restatements and the turnover of firm executives and find that financial restatements lead to the turnover of firm executives. They often concern the above effects in developed countries such as America rather than those in developing countries. Besides, financial restatements externally prompted are more serious. However, past research little explores this type of financial restatement. Therefore, this study aims to examine the association between mandatory financial restatements and the turnover of firm executives—the chairman and the CEO in Taiwan. The findings show that there is positive relationship between mandatory financial restatements and the turnover of the CEO. However, we do not find there is positive association between mandatory financial restatements and the turnover of the chairman. The implications are as follows. As the CEO has power to make firm major decisions, including financial reporting, he should be responsible for financial restatements. The chairman is the leader of a firm. Replacing the chairman may significantly affect firm normal operation. Hence, firms are not easily to replace the chairman unless there is concrete evidence showing that he should be responsible for the financial restatements.

CEO Age and Financial Reporting Quality

2012 ◽  
Vol 26 (4) ◽  
pp. 725-740 ◽  
Author(s):  
Hua-Wei Huang ◽  
Ena Rose-Green ◽  
Chih-Chen Lee
Keyword(s):  
Financial Reporting ◽  
Reporting Quality ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Chief Executive ◽  
Data Availability ◽  
Financial Reporting Quality ◽  
Financial Restatements ◽  
Ceo Age ◽  
Analyst Earnings

SYNOPSIS: This study examines the association between chief executive officer (CEO) age and the financial reporting quality of firms. The financial reporting qualities examined are the meeting or beating of analyst earnings forecasts and financial restatements. Based on extant research, we hypothesize that older CEOs are associated with higher-quality financial reporting. Using a sample of 3,413 firms for the period 2005 to 2008, we find a positive association between CEO age and financial reporting quality. Specifically, we find that CEO age is negatively associated with firms meeting or beating analyst earnings forecasts and financial restatements. Our study therefore extends the corporate governance and financial reporting quality literature by identifying CEO age as a determinant of financial reporting quality. Data Availability: Data are publicly available.

Do PCAOB Inspection Reports Influence Corporate Executives' Perceptions of Audit Quality and the Likelihood of Switching Auditors?

2014 ◽  
Vol 14 (1) ◽  
pp. 48-71 ◽  
Author(s):  
Jesse C. Robertson ◽  
Chad M. Stefaniak ◽  
Richard W. Houston
Keyword(s):  
Financial Reporting ◽  
Response Pattern ◽  
Audit Quality ◽  
Data Availability ◽  
Response Patterns ◽  
Auditor Switching ◽  
Corporate Executives ◽  
Public Company ◽  
Mixed Responses

ABSTRACT The PCAOB conducts inspections of public company auditors to improve audit quality and build investors' confidence in the quality of financial reporting (PCAOB 2010f). While there is some evidence that the inspection reports could be improving actual audit quality (e.g., Gramling et al. 2011; Carcello et al. 2011), their impact on perceptions of audit quality remains largely unexplored. We investigate the effects of inspection reports, which consistently disseminate negative information in the form of audit deficiencies (and in some cases, quality control criticisms) on perceived audit quality and potential auditor switching. We report the results of an experiment in which 90 corporate executives considered one of three response patterns that firms typically offer across multiple inspection reports: consistently provide concessions, consistently provide denials, or provide mixed responses that consist of both concessions and denials. We find that PCAOB inspection reports generally decrease perceived audit quality, regardless of response pattern, which, in turn, is generally associated with an increased likelihood that executives will consider switching auditors. We offer implications for audit policy and research, including the possibility that, while PCAOB inspections could be improving actual audit quality, the reports could be imposing costs by reducing perceived audit quality and, in turn, increasing the likelihood of auditor changes. Data Availability: Contact the first author.

Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective

2016 ◽  
Vol 36 (2) ◽  
pp. 21-43 ◽  
Author(s):  
Lucy Huajing Chen ◽  
Hyeesoo H. (Sally) Chung ◽  
Gary F. Peters ◽  
Jinyoung P. (Jeannie) Wynn
Keyword(s):  
Financial Reporting ◽  
Internal Audit ◽  
Positive Association ◽  
Audit Fees ◽  
Data Availability ◽  
Company Performance ◽  
Potential Threat ◽  
External Audit ◽  
Internal Auditors ◽  
Survey Responses

SUMMARY This paper considers the potential impact of internal audit incentive-based compensation (IBC) linked to company performance on the external auditor's assessment of internal audit objectivity. We posit that external auditors will view IBC as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk. The increase in risk and external auditor effort should result in higher audit fees. We hypothesize that the form of incentive-based compensation, namely stock-based versus cash bonuses, moderates the association between IBC and external audit fee. Finally, we consider whether underlying financial reporting risk mitigates the external auditor's potential sensitivity to IBC. We find a positive association between external audit fees and internal audit compensation based upon company performance. The association is acute to IBC paid in stock or stock options as opposed to cash bonuses. We also find evidence consistent with the IBC associations being mitigated by the company's financial reporting risks. Data Availability: Individual survey responses are confidential. All other data are derived from publicly available sources.

An Examination of Partner Perceptions of Partner Rotation: Direct and Indirect Consequences to Audit Quality

2012 ◽  
Vol 31 (1) ◽  
pp. 97-114 ◽  
Author(s):  
Brian E. Daugherty ◽  
Denise Dickins ◽  
Richard C. Hatfield ◽  
Julia L. Higgs
Keyword(s):  
Quality Of Life ◽  
Audit Quality ◽  
Negative Impact ◽  
Survey Instrument ◽  
Unintended Consequence ◽  
Data Availability ◽  
Structured Interviews ◽  
Partner Perceptions ◽  
New Industry

SUMMARY Using structured interviews and surveys of practicing audit partners, this study examines their perceptions with regard to mandatory partner rotation and cooling-off periods, and how recently enacted, more stringent rules, may negatively impact auditors' quality of life to the detriment of audit quality. Results suggest rotation, in general, increases partners' workloads and the likelihood of relocation. Additionally, results suggest that in response to accelerated rotation (and an extended cooling-off period), partners would rather learn a new industry than relocate. Importantly, partners perceive audit quality suffers from retraining, but not from relocating. Thus these results suggest an indirect, negative impact, and unintended consequence, of accelerated rotation/extended cooling-off periods on audit quality. Data Availability: The survey instrument is available upon request. Individual audit partner responses are confidential.

The Influence of Country-Level Religiosity on Accounting Conservatism

2018 ◽  
Vol 18 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Matt Bjornsen ◽  
Chuong Do ◽  
Thomas C. Omer
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Positive Association ◽  
Accounting Conservatism ◽  
Data Availability ◽  
Country Level ◽  
Legal Enforcement ◽  
Prior Literature ◽  
Reported Earnings ◽  
High Degree

ABSTRACT This study investigates how religiosity (i.e., the strength of religion) differences across countries influence an important characteristic of financial reporting, accounting conservatism. Prior literature suggests that religious individuals are more risk averse and have higher ethical standards, while accounting conservatism has been shown to reduce various risks to the firm (e.g., bankruptcy and stock price crashes) at the expense of higher reported earnings. We find that managers in more religious societies report more conservatively. Specifically, our cross-country analysis reveals that firms headquartered in countries with higher levels of religiosity exhibit, on average, higher accounting conservatism in financial reporting. This positive association is stronger in countries following IFRS or U.S. GAAP, and weaker in countries with a high degree of uncertainty avoidance, strong legal enforcement, and countries with greater numbers of religions. JEL Classifications: G34; M41; Z12. Data Availability: Data are available from the public sources cited in the text.

The Auditor as a Determining Factor on Derivative Financial Instrument Disclosures

2019 ◽  
pp. 70-93
Author(s):  
Kátia Lemos ◽  
Sara Serra ◽  
Amidel Barros
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Accounting Standards ◽  
Financial Instruments ◽  
Financial Instrument ◽  
Audit Firm ◽  
Academic Literature ◽  
Number Of Factors ◽  
Determining Factor

Based on the premise that the quality of the audit is related to the quality of the financial reporting, the purpose of this chapter is to verify if the audit is a determining factor in derivative financial instruments disclosures. However, the academic literature has revealed that audit quality is influenced by a number of factors, such as gender, experience, and auditor's fees, as well as the type of audit firm (Big4 or not Big4). In order to achieve the proposed objective, a disclosure index was prepared, based on the requirements of the International Accounting Standards Board (IASB), applied to companies listed on Euronext Lisbon, excluding the sports corporations. The results revealed that the level of disclosure is influenced by the size of the audited company and by the auditor's gender, being greater in the larger companies and in the companies audited by a male auditor.

The Effect of Employee Treatment Policies on Internal Control Weaknesses and Financial Restatements

2015 ◽  
Vol 91 (4) ◽  
pp. 1167-1194 ◽  
Author(s):  
Jun Guo ◽  
Pinghsun Huang ◽  
Yan Zhang ◽  
Nan Zhou
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Employee Benefits ◽  
Data Availability ◽  
Top Executives ◽  
Material Weaknesses ◽  
Financial Restatements ◽  
Treatment Policies ◽  
Employee Treatment

ABSTRACT This study investigates the role of employment policies in reducing internal control ineffectiveness and financial restatements. We provide new evidence that employee treatment policies are an important predictor of ineffective internal control. We also find that employee-friendly policies significantly reduce the propensity for employee-related material weaknesses. These results suggest that greater employee benefits facilitate the acquisition, development, and motivation of the workforce and ameliorate the loss of valuable human capital, thereby mitigating employee failures to implement internal control tasks properly. Moreover, we document novel results that financial restatements, especially those caused by unintentional errors, are less likely to arise in firms that invest more in employee benefits. Collectively, our emphasis on the effect of employee treatment policies on the integrity of internal control and financial reporting distinguishes our paper from previous studies that focus on the role of top executives in accounting practices. Data Availability: Data are available from public sources indicated in the text.

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