Financial Restatements, Auditor Dismissals and Resignations: Auditor-Related Characteristics and Economic Consequences

• In Event: Breakfast and Research Forum
  In Roundtable Session: Table 18: Audit Failures

Abstract

This paper discusses the auditor switching decisions by post-restatement firms and their incumbent auditors. Furthermore, the study simultaneously examines whether post-restatement firms are more likely to dismiss auditors to respond to their financial credibility crisis and whether auditors are also more likely to resign from post-restatement firms. The empirical results confirm these arguments. We also examine which auditor-related characteristics affect the decision of dismissal and resignation for post-restatement firms and their auditors. We further find the decisions of auditor dismissals and resignations depend on auditor characteristics such as auditor tenure, auditor size and auditor opinion. We find that post-restatement firms in the 6 (12 and 24) months following restatement announcements dismiss their incumbent auditor (have their incumbent auditor resign) earlier than non-restating matching firms. The study further discusses the economic consequences that the post-restatement firms face conditional on auditor switching decisions done by firms and auditors. We did find that post-restatement firms incurring an auditor dismissal following restatement announcements are more likely to have higher short-term and long-term stock performance surrounding and after auditor dismissals.

Authors

• Ken Y. Chen, National Taiwan University

• Randal J Elder, Syracuse University

• Sheng-Min Hung, Soochow University