This study offers insights into how restatements by one client may impact an auditor’s other clients. The authors find evidence suggesting that when an auditor’s clients restate their financial statements, the auditor’s reputation for audit quality suffers. Non-restating clients experience a small negative market reaction around the restatement date and a higher likelihood of dismissing that auditor. These findings may inform audit firms and their clients about the potential negative consequences of restatements by other clients.

Irani, A.J., S.L. Tate, and L. Xu. 2015. Restatements: Do They Affect Auditor Reputation for Quality. Accounting Horizons 29 (4): 829-851.

http://www.auditingresearchsummaries.org

The results of this study are consistent with the idea that auditor reputation has an effect on analysts’ forecasts. The authors specifically examine on the collapse of Andersen, an event that was unprecedented in terms of its scope and scale. By focusing on analysts’ forecasts for this time period, audit quality concerns are the most plausible explanation for the results produced. The evidence found in this study extends upon prior research and contributes to the research on forecast revision frequency and forecast properties, as well as on the collapse of Andersen.

Cahan, S. F., P. K. Chaney, D. C. Jeter, and Wei Zhang. 2013. Damaged Auditor Reputation and Analysts’ Forecast Revision Frequency. Auditing 32 (1).

The results of the study strongly suggest that initial-year audit discounts are quite common and substantial in the post-SOX period. Although the existence of lowballing seems to be a threat to independence, at least in appearance, the existing research on lowballing provides mixed results on its impact on audit quality. The findings will likely be of interest to the PCAOB as it searches for ways to bolster auditor independence and other regulators because many, including the GAO, believe that without non-audit service fees, auditors are less likely to offer ‘‘loss-leader’’ fees for audits.

For more information on this study, please contact Rosemond Desir.

Desir, R., J. R. Casterella, and J. Kokina. 2014. A Reexamination of Audit Fees for Initial Audit Engagements in the Post-SOX Period. Auditing: A Journal of Practice & Theory 33 (2):  59-78

http://www.auditingresearchsummaries.org

This objective of this study is to determine whether auditor quality and audit committee financial expertise are associated with improved restatement disclosure timeliness as reflected in reduced dark periods. Recent actions by regulatory agencies suggest that the timeliness of financial reporting remains a top priority of investors and regulators. This study finds evidence that both the auditors and audit committees can provide significant value to clients and improve timely disclosure of restatement details. 

Schmidt, J., and M. S. Wilkins. 2013. Bringing Darkness to Light: The Influence of Auditor Quality and Audit Committee Expertise on the Timeliness of Financial Statement Restatement Disclosures. Auditing 32 (1).

This study displays the many outcomes and reasons for those outcomes that could occur when a company decides to switch auditors or when auditor decide to leave a client. Although this study did not find consistent evidence to support the idea that auditor downgrade leads to greater discretionary accruals and possible audit deterioration only highlights the complexities of the client-auditor relationship. Both client companies and audit firms could benefit from the findings of this study by considering the wide range of effects of auditor switching on financial reporting before deciding to switch.

For more information on this study, please contact Brian T. Carver.
 

Carver, B.T., C.W. Hollingsworth, and J.D. Stanley. 2011. Recent auditor downgrade activity and changes in clients’ discretionary accruals. Auditing: A Journal of Practice and Theory 30 (3): 33-58.

http://www.auditingresearchsummaries.org