The Significance of Annual Restatements in Auditor Litigation, Past, Present, and Future

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Abstract

We do not know whether there have been changes – focusing the analysis into one year at a time periods – in the relationship between annual restatements and auditor litigation, and, if so, what these changes might be.
In this study of 2,393 financial reporting lawsuits commenced 1993 through 2008, results suggest that the “old normal” pattern of restatements of annual financial statements being associated with the naming of the auditor as a defendant in financial reporting lawsuits, as well as the outcome of the auditor in lawsuits, was twice disrupted.
The first disruption occurred after 1998. In the 1999-2001 lawsuit filings, annual restatements were not a significant factor, even though they were in 1998 and prior years.
The second disruption occurred after 2002. In the post-2002 lawsuit filings, annual restatements were again temporarily not a significant factor, even though they were in the 2002 lawsuit filings.
Early evidence suggests a return to the “old normal” pattern of restatements of annual financial statements being significantly associated with the naming of the auditor as a defendant in financial reporting lawsuits, as well as the outcome of the auditor in lawsuits.

Author

• Ross D Fuerman, Suffolk University