Interim Restatements and the Year-End Audit

• In Event: Distress, Restatements, and Auditor Opinions

Abstract

Interim restatements make up approximately 16% of all restatements from 2004-2015, yet little research investigates their effect on the year-end audit. While annual restatements indicate a low quality audit was performed, an interim restatement could reflect high audit quality as interim restatements correct mistakes before year-end. Further, auditor offices detecting interim restatements could signal high quality audit offices. To test the implications of interim restatements, we first compare the year-end audit fees and audit quality of clients with interim restatements to clients without interim restatements (clean clients). We find auditors charge clients with interim restatements an audit fee that is approximately 21.65%, or $280,000, higher, on average, and perform year-end audits that are either of similar or lower quality. Second, we compare clean clients of offices issuing interim restatements (affected offices) to the clean clients of offices without interim restatements (unaffected offices). We find clean clients in affected offices receive similar or weakly significant worse quality audits compared to the clean clients of unaffected offices. We find the lower audit quality result is concentrated in affected Big N offices whose quality is significantly worse than unaffected Big N offices, while affected non-Big N offices perform significantly higher quality audits compared to unaffected non-Big N offices. Overall, we interpret these results as evidence that interim restatements signal a lower quality year-end audit and a lower (higher) quality Big N (non-Big N) audit office.

Authors

• Nicholas Cicone, University of Florida

• Hyun Jong Park, University of Florida