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    Evidence on the Association between Financial Restatements...
    research summary posted October 31, 2013 by Jennifer M Mueller-Phillips, last edited January 14, 2014, tagged 02.0 Client Acceptance and Continuance, 02.06 Resignation Decisions, 03.0 Auditor Selection and Auditor Changes, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements 
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    Title:
    Evidence on the Association between Financial Restatements and Auditor Resignations
    Practical Implications:

    Restatements are an important determinant of auditor resignation. Severe restatements affect new auditor choice. Auditor resignations are another significant cost imposed on restatement companies since companies tend to hire a lower-quality auditor.

    For more information on this study, please contact Ying Huang.
     

    Citation:

    Huang, Y. and S. Scholz. 2012. Evidence on the Association between Financial Restatements and Auditor Resignations. Accounting Horizons 26 (3): 439-464.

    Keywords:
    restatement; auditor resignation; new auditor type
    Purpose of the Study:

    Regulators, standard setters, and investors have expressed concern over the increasing frequency of financial statement restatements. This study examines the effect of restatements on auditors’ client continuance decisions by investigating the association between financial restatements and auditor resignations.

    Design/Method/ Approach:

    The authors use a sample of financial restatements from 2003 – 2007. They examine client dismissals of auditors and auditor resignations during the quarter before a restatement announcement and the four quarters afterwards. The authors compare auditor resignation firms with dismissal firms and with firms that have no change in auditor.

    Findings:

    19 percent of restating companies experience an auditor resignation in the five-quarter window surrounding the restatement announcement, significantly more than the 1 percent of non-restating companies that experience a resignation in a given sample year.
    Restatements are more positively associated with auditor resignations compared with dismissal firms or no-switch firms. Specifically, restatement increases the odds of an auditor resignation more than 28-fold when the control group is no-switch companies, and nearly nine-fold relative to dismissal companies, after controlling for other determinants of auditor resignations.
    Resignations are associated with more severe restatements when compared with no-switch firms. However, restatement severity does not distinguish between resignations and dismissals.
    Clients with relatively serious restatements tend to hire new auditors from a smaller tier.
     

    Category:
    Accountants' Reporting, Auditor Selection and Auditor Changes, Client Acceptance and Continuance
    Sub-category:
    Dismissal Decisions – impact of restatements - disagreements - fees - mergers etc, Resignation Decisions, Restatements