Restatements and the Distribution of Audit Office Resources.

• In Event: Audit Office Resources and Control Issues in Audit

Abstract

Prior research suggests auditor resources are quasi-fixed at the office-level: local audit offices operate as semi-autonomous units, and resources are costly to transfer across offices. The objective of this study is to document a relation created by office-level resource constraints; the allocation of additional resources to one engagement is accompanied by a decrease in the resources allocated to concurrent engagements. To accomplish this, I examine the effect a restatement has on auditor effort for both clients issuing restatements and non-restating clients of the same audit office. I document increased audit fees and an improvement in audit quality for restating clients, indicative of additional resources being allocated to high-risk engagements. For non-restating clients of offices issuing a restatement, I document lower audit fees and an increased likelihood of misstatement. The effects for non-restating clients are strongest in offices issuing multiple restatements and in small offices, where incrementally more resources are drawn from concurrent engagements. This study contributes to a better understanding of auditor behavior by providing evidence changes in a single client’s risk profile can alter the distribution of office resources and affect audit quality, underscoring the importance of properly assessing and addressing resource limitations.

Author

• Jonathan Nash, University of New Hampshire