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  • Jennifer M Mueller-Phillips
    Do Financial Restatements Lead to Auditor Changes?
    research summary posted March 9, 2015 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.03 Restatements, 12.05 Changes in Reporting Formats in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Do Financial Restatements Lead to Auditor Changes?
    Practical Implications:

    Since the reasons for auditor changes are rarely publicly revealed, the authors acknowledge that this study only shows an association, and not a causal relationship, between restatement announcements and subsequent auditor changes. While the authors attempt to control for all known determinants of auditor changes in the empirical testing, it is possible that the results are biased due to omitted variables.

    For more information on this study, please contact Vivek Mande.

    Citation:

    Mande, V. and M. Son. 2013. Do Financial Restatements Lead to Auditor Changes? Auditing: A Journal of Practical & Theory 32 (2): 119-145. 

    Keywords:
    restatement; auditor switch; dismissal; resignation; abnormal market returns
    Purpose of the Study:

    This study examines whether financial restatements are associated with subsequent auditor changes. A financial restatement represents a breakdown in a company’s financial reporting, but, importantly, also of its audit. The paper argues that in response to pressure from capital markets, restating firms will dismiss their auditors to increase audit quality and restore reputational capital lost when the restatements are announced to the investing public. 

    Design/Method/ Approach:

    The sample includes 3,492 auditor changes. The authors model the likelihood of an auditor change as a function of one-period lagged restatements and a set of predetermined lagged control variables used by previous studies. The research relates auditor changes to restatements in the previous year rather than the current year to rule out the possibility that the restatements may have occurred at the urging of the new auditor.

    The first set of control variables relates to auditor characteristics. It is expected that auditor changes occur more frequently when: audit opinions are not clean, auditor tenure is either short or long, audit fees are high, and the auditor does not have industry expertise. The study also includes controls for clients’ financial risks and mergers and acquisitions (M&A). Year and industry dummies are included as controls in the model.

    Findings:

    Using a large sample of restatements and auditor changes, the study finds that the likelihood of auditor-client realignments increases after firms announce restatements. It is also found that the positive association between restatements and auditor turnovers is more pronounced when restatements are more severe and the quality of corporate governance is high. Finally, the study finds that stock market returns surrounding auditor changes increase as the severity of restatements increases. 

    Category:
    Accountants' Reporting
    Sub-category:
    Changes in Reporting Formats, Changes in Reporting Formats, Restatements
  • Jennifer M Mueller-Phillips
    Determinants and Market Consequences of Auditor Dismissals...
    research summary posted February 24, 2015 by Jennifer M Mueller-Phillips, tagged 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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Determinants and Market Consequences of Auditor Dismissals after Accounting Restatements
    Practical Implications:

    The results of this study are important for regulators and audit committee members who are concerned with the ability of the audit market to self-regulate. Specifically, the evidence suggests that firms with higher switching costs and fewer replacement auditor choices are less likely to dismiss their auditors after a restatement. This evidence informs the debates about the costs of mandatory auditor rotation and the limited competition in the audit market. Additionally, the evidence of a positive market reaction to dismissals after severe restatements is consistent with firms restoring financial reporting credibility by replacing their auditors, and this should be of interest to audit committee members considering various corrective actions after a misstatement.

    Citation:

    Hennes, K., A. Leone, and B. Miller. 2014. Determinants and Market Consequences of Auditor Dismissals after Accounting Restatements. The Accounting Review 89 (3): 1051­–1082.

    Keywords:
    restatements, auditor dismissals, corporate governance
    Purpose of the Study:

    Auditors play an integral role in assuring the integrity of financial reporting, and market participants continue to debate the ability of the audit market to self-regulate adequately. One of the challenges in evaluating audit performance is that audit quality is difficult to observe and measure. Restatements, however, provide a visible signal of poor audit quality that can impose significant costs on firms. Firms respond to restatements with a variety of corrective actions, including the possible reconsideration of the external auditor. The purpose of this study is to provide evidence on the circumstances under which boards dismiss auditors in response to restatements and to examine how the market responds to those dismissals. 

    Design/Method/ Approach:

    This study examines a sample of public-company restatements occurring between 1997 and 2010. The authors focus only on restatements where the incumbent auditor opined on at least one annual period prior to the restatement announcement. Firm and restatement characteristics and executive and auditor turnover data is gathered from publicly available information.

    Findings:
    • The authors find that auditors are more likely to be dismissed after more severe restatements but that the severity effect is primarily attributable to the dismissal of non-Big 4 auditors rather than Big 4 auditors.
    • The authors document that among corporations with Big 4 auditors, those that are larger and more complex operationally are less likely to dismiss their auditors.
    • The study also examines contemporaneous executive turnover and finds evidence that boards view auditor dismissals as complementary rather than substitute responses to restatements.
    • Lastly, the study documents that the market reaction to an auditor dismissal (with a contemporaneous engagement of a comparable-sized auditor) is significantly more positive following more severe restatements (5.9%) than less severe restatements (0.6%). 
    Category:
    Accountants' Reporting, Auditor Selection and Auditor Changes
    Sub-category:
    Dismissal Decisions – impact of restatements - disagreements - fees - mergers etc, Restatements
  • Jennifer M Mueller-Phillips
    The Relationship between Audit Report Lags and Future...
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Relationship between Audit Report Lags and Future Restatements
    Practical Implications:

    It is important for auditors to understand that extending an audit not only creates the opportunity to collect additional evidence but also increased the time pressure on auditors. Audit firms should consider how to mitigate the time pressure associated with long audit. Further, audit committees should understand the trade-off involved in pressuring the auditors to meet filing deadlines and the effect on audit quality. Finally, regulators should be attentive to the consequences future regulation can have with time pressures on auditors and reduced filing times

     

     

    For more information on this study, please contact Dr. David Hurtt.

    Citation:

    Alan I. Blankley, David N. Hurtt, and Jason E. MacGregor. 2014. The Relationship between Audit Report Lags and Future Restatements. Auditing: A Journal of Practice & Theory 33 (2): 27-57.

    Keywords:
    Audit report lag, restatements, time pressure
    Purpose of the Study:

    It is important for financial statements users to understand what factors could signal a heightened risk for future financial statement restatement. This paper considers whether audit report lag, that is the time gap between fiscal year-end and the date of the auditor’s report, is associated with a heighten risk of future restatement.

    Some believe the audit report lag signals the volume of work expended to complete the audit engagement. Under this belief, the lag is viewed as a proxy for an auditor effort. So an unexpectedly long audit would indicate that additional effort was exerted. Since auditor effort should reduce the risk of restatement, unexpectedly long audit would indicate lower risk of future restatements. However, some believe audit lag indicates the time pressure an auditor is facing to complete the engagement. Since time pressure undermines auditor effectiveness, long audit would increase the risk of restatement. 

    Design/Method/ Approach:

    Audit lag data and restatement data was collected from Audit Analytics for the 2002 through 2009 period. The authors used two statistical models to study the association audit lag may have with future restatements. First, using an audit lag model based on prior research, the authors derived the abnormal or unusual audit lag after controlling for audit risk, client complexity, internal control strength and other influences on lag. In the second model, the authors tested a robust logistic regression model where the variable of interest was the abnormal audit lag derived from the first model.

    Findings:
    • The authors find that there is a positive relationship between abnormal audit report lag times and the probability of a future financial statement restatement. This indicates long auditors are associated with low quality audit.
    • There is a positive relationship between auditor expertise and probability of a future restatement. The authors suggest that expertise brings in difficult engagements with complex audit issues, increasing the lag and the probability of a future restatement.
    • The authors contend that their findings indicate that audit report lags are associated time pressure. 
    Category:
    Accountants' Reporting, Engagement Management
    Sub-category:
    Budgeting & Audit Time Management, Restatements
  • Jennifer M Mueller-Phillips
    Abnormal Audit Fees and Restatements
    research summary posted October 20, 2014 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Abnormal Audit Fees and Restatements
    Practical Implications:

    The conclusion that audit fees are associated with the risk of audit failure may impact auditors as they face pressure to reduce audit fees. Auditors should consider this risk based on the client’s position as well as trying to minimize risk related to audit fee reductions. Similarly, client’s audit committee should consider the trade-off between current fees and the risk of restatement. With the changes that SOX introduced, regulators should review how changes in audit fees affects the quality of financial statements over time.

     

     

    For more information on this study, please contact Dr. David Hurtt.

    Citation:

    Alan I. Blankley, David N. Hurtt, and Jason E. MacGregor. 2012. Abnormal Audit Fees and Restatements. Auditing: A Journal of Practice & Theory: 31 (1): 79-96.

    Keywords:
    Restatements, audit fees, audit quality
    Purpose of the Study:

    Overall, this paper investigates whether there is a relationship between audit fees and subsequent financial statement restatements. The authors investigated whether audit firms charged more for audit services prior to a restatement compared to non-restatement clients. Past research finds that this relationship has a positive correlation. However, the authors revisited this relationship for the post-SOX period based on multiple factors:

     

    • The relationship of audit fees to future restatements is unclear since high fees may increase restatement probability due to independence issues, while low fees may increase the probability of future restatement because they potentially reflect lower levels of service or effort.
    • SOX affects the auditor-client relationship through changes such as partner rotation and prohibiting some non-audit services provided to audit clients. Research revealed a shift in firms increasing pricing for risk.
    • With the recent economic downturn, companies trying to decrease audit fees could be focusing on cutting cost instead of focusing on the quality of the financial statements.
    • Past research was inconclusive on the relationship between future restatements and audit fees because of the time frame studied as well as the omission of an internal control strength variable.

     

    Finding a clear relationship between audit fees and future restatements could have implications in how auditors, audit committees, and regulators view audit fees in a post-SOX business environment. As a result, the study could impact fee negotiations from the standpoint of audit quality.

    Design/Method/ Approach:

    Audit fee and restatement data was collected from Audit Analytics for the 2002 through 2009 period. The authors used two statistical models to study the association audit fees may have with future restatements. First, using an audit fee model based on prior research, the authors derived the abnormal or unusual audit fee after controlling for audit risk, client complexity, internal control strength and other influences on fees. In the second model, the authors tested a robust logistic regression model where the variable of interest was the abnormal audit fee derived from the first model. 

    Findings:
    • The authors find that abnormal audit fees are negatively associated with the probability of future financial statement restatements.
    • When audit fees are noticeably high, the likelihood of restatement is low. When audit fees are noticeably low, the likelihood of restatement is high.
    • When audit fees are abnormally low, there may be pressure for auditors to maintain the profitability of the engagement by minimizing hours to complete the audit.
    • This relationship is robust when the model included or excluded a variety of internal control and restatement variables.
    Category:
    Accountants' Reporting, Engagement Management
    Sub-category:
    Audit Fees & Fee Negotiations, Restatements
  • Jennifer M Mueller-Phillips
    Bringing Darkness to Light: The Influence of Auditor Quality...
    research summary posted June 2, 2014 by Jennifer M Mueller-Phillips, tagged 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, 13.0 Governance, 13.01 Board/Audit Committee Composition in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Bringing Darkness to Light: The Influence of Auditor Quality and Audit Committee Expertise on the Timeliness of Financial Statement Restatement Disclosures
    Practical Implications:

    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. 

    Citation:

    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).

    Keywords:
    accounting expertise; audit committees; audit quality; financial expertise; financial reporting timeliness; financial statement restatements
    Purpose of the Study:

    Several recent regulatory actions suggest that the timely reporting of financial data is a top priority of investors and regulators. This study investigates whether auditor quality and audit committee expertise are associated with improved financial reporting timeliness as measured by the duration of a financial statement’s “dark period.” The restatement dark period represents the length of time between a company’s discovery that it will need to restate financial data and the subsequent disclosure of the restatement’s effect on earnings. This dark period restatement setting helps to address the fundamental question of whether better governance helps companies resolve financial reporting problems. 

    Design/Method/ Approach:

    The authors selected a sample of 154 firms announcing dark restatements disclosed between 2004 and 2009. This sample was used to test the following hypotheses:

    • H1: Restatement dark periods are shorter for clients of Big 4 auditors. 
    • H2a: Restatement dark periods are shorter when the audit committee contains a larger proportion of financial experts. 
    • H2b: Restatement dark periods are shorter when the audit committee contains a larger proportion of accounting financial experts.
    • H3: Restatement dark periods are shorter when the audit committee chair has accounting financial expertise. 

    A multivariate model was then used to investigate the determinants of the length of restatement dark periods of the selected sample. 

     

    Findings:
    • Dark periods are shorter in the presence of Big 4 auditors.
    • Restatement dark periods are shorter among clients that have audit committees with more financial accounting experts. 
    • The relationship between the audit committee financial expertise and restatement dark periods is primarily attributable to the presence of an audit committee chair who is an accounting financial expert. 
    • With these factors present, restatement disclosures are provided up to 38 percent faster
    Category:
    Accountants' Reporting, Auditor Selection and Auditor Changes, Governance
    Sub-category:
    Board/Audit Committee Composition, Dismissal Decisions – impact of restatements - disagreements - fees - mergers etc, Restatements
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  • Jennifer M Mueller-Phillips
    The Contagion Effect of Low-Quality Audits
    research summary posted April 28, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.10 Impact of office size, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Contagion Effect of Low-Quality Audits
    Practical Implications:

    The findings of this study should be of interest to regulators, audit standard-setters, accounting firms, and investors because they provide a method to infer the overall quality of an auditor office location though the use of easily obtainable and publicly available information on restatements. This information can be used to identify offices where audits are more likely to be of lower quality, and to develop standards that emphasize the potential for quality-control problems in the offices of multi-location audit firms. Investors may be able to use it as one piece of additional information with which to infer something about the earnings quality of a particular company based on the history of the auditor office that performs the audit.

    For more information on this study, please contact Jere R. Francis.
     

    Citation:

     Francis, J. R., and P. N. Michas. 2013. The Contagion Effect of Low-Quality Audits. The Accounting Review 88 (2).

    Keywords:
    audit quality; auditor offices; contagion
    Purpose of the Study:

    A low-quality audit is defined as the presence of one or more clients with overstated earnings that were subsequently corrected by a downward restatement. A “contagion” of low quality audits could occur in an auditor office location due to office-specific characteristics including personnel and quality-control procedures. Prior research provides evidence that differences in characteristics across offices of accounting firms are an important determinant of audit quality, and that  differences in audit quality can exist even within the same audit firm, depending on office-level characteristics. The authors of this study investigate if the existence of at least one low-quality audit in an auditor office indicates the presences of a contagion effect on the quality of other audits conducted by the office.
     

    Design/Method/ Approach:

    The authors first developed the following three hypotheses for testing:

    H1: The existence of an audit failure in an auditor office is indicative of a contagion effect that reveals the presence of other concurrent low-quality audits in the office.

    H2: There is lees contagion in large Big4 offices than in small Big 4 offices.

    H3: There is less contagion in a Big 4 office where relatively more audits are conducted in the office’s area of industry expertise, compared to Big 4 offices where relatively fewer audits are conducted in the office’s area of industry expertise. 

    The authors use the Audit Analytics database to identify restatements and the original filing year for which the financial statements were subsequently restated. The Compustat Unrestated U.S. Quarterly Data File was used to obtain originally released and subsequently restated accounting data and cross referenced this sample with the one pulled from the Audit Analytics database. The final sample is comprised of 22,626 firm-year observations for 4,765 unique companies from 2000 through 2008.
     

    Findings:
    • Offices with client restatements in the past are more likely to have new client restatements for up to five years in the future.
    • In auditor offices where an audit failure occurred, the concurrent clients of that office have a higher level of abnormal accrual compared to offices with zero audit failures.
    • The results above hold for all but the largest quartile of office size, indicating that office size is also an important factor in contagion.
    • A relatively high use of industry expertise in a Big 4 office can mitigate the negative effect of small office size.
       
    Category:
    Accountants' Reporting, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Impact of Office Size, Restatements
  • Jennifer M Mueller-Phillips
    Associations between Internal and External Corporate...
    research summary posted October 31, 2013 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.05 Impact of SOX, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements, 13.0 Governance in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Associations between Internal and External Corporate Governance Characteristics: Implications for Investigating Financial Accounting Restatements
    Practical Implications:

    Prior studies’ conflicting results regarding the association between corporate governance measures and restatements are explained (at least partially) by the time period in which the relationship is examined. The relationship is different before and after Sarbanes Oxley (2002). However, this paper cannot determine whether the change in relationship was caused by Sarbanes Oxley or whether it happened for another reason.

    For more information on this study, please contact William R. Baber.
     

    Citation:

    Baber, W. R., L. Liang, and Z. Zhu. 2012. Associations between Internal and External Corporate Governance Characteristics: Implications for Investigating Financial Accounting Restatements. Accounting Horizons 26 (2): 219-237.

    Keywords:
    corporate governance; governance regulation; accounting restatements
    Purpose of the Study:

    Prior studies have found conflicting results as to whether corporate governance characteristics are related to accounting restatements. Some of these prior students examine restatements prior to Sarbanes Oxley (2002), and some examine restatements afterwards. This study seeks to reconcile the findings of previous research and determine whether the relationship between corporate governance and accounting restatements has changed over time.

    Design/Method/ Approach:
    • Authors examine corporate governance data from 1997 and 2005 to compare differences in governance over time.
    • Corporate governance characteristics are divided between factors that affect internal governance (defined as characteristics that presumably govern the efficacy of board of director oversight of management) and factors that affect external governance (defined in terms of the ability of shareholders to intervene in decisions by both management and the board of directors)
    • Investigate the association between 1997 corporate governance and the probability that financial statements from 1995-1999 are restated; also investigate the association between 2005 corporate governance and the probability that financial statements from 2003-2007 are restated.
       
    Findings:
    • There is a substantial increase in internal governance during the period when changes were imposed by stock exchanges and by the U.S. Congress in the Sarbanes-Oxley Act (2002). The change in internal governance is offset by a less substantial, yet statistically significant, decrease in external governance which is consistent with the observation that shareholder oversight is recently declining.
    • In 1997, internal and external governance characteristics are substitutes for each other (firms tend to do one or the other); in 2005, however, internal and external governance is not related.
    • Corporate governance characteristics in 1997 (prior to Sarbanes Oxley) are unrelated to the probability of financial statement restatements, whereas the correlation between corporate governance characteristics and restatements is statistically significant in 2005 (after Sarbanes Oxley).
      • Thus, the cross-sectional relationship between governance characteristics and restatement changed between 1997 and 2005.
    • The relationship between corporate governance measures in 2005 and restatements in 2003-2007 is not significant if interactions between internal and external governance measures are omitted from the model.
       
  • Jennifer M Mueller-Phillips
    Evidence on the Association between Financial Restatements...
    research summary posted October 31, 2013 by Jennifer M Mueller-Phillips, 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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    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
  • Jennifer M Mueller-Phillips
    Female Board Presence and the Likelihood of Financial...
    research summary posted October 31, 2013 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.03 Restatements, 13.0 Governance, 13.01 Board/Audit Committee Composition in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Female Board Presence and the Likelihood of Financial Restatement
    Practical Implications:

    Female board presence has a beneficial impact on a board of director’s governance function and is negatively associated with financial restatements, a costly ordeal for any company. Increasing board diversity through many characteristics (culture, age, etc.) helps avoid the pitfalls of groupthink and leads to better corporate governance.

    For more information on this study, please contact Lawrence J. Abbott at the University of Wisconsin-Milwaukee (abbotl@uwm.edu).
     

    Citation:

    Abbott, L. J., S. Parker, and T. J. Presley. 2012. Female Board Presence and the Likelihood of Financial Restatement. Accounting Horizons 26 (4): 607-629

    Keywords:
    board gender diversity; corporate governance; restatement.
    Purpose of the Study:

    A large amount of research has been devoted to understanding the relationship between board member independence and financial restatements. However, the overall results have been mixed with evidence for and against the idea that director independence leads to better governance. The study tests whether a more diverse board leads to greater independence and therefore a lower likelihood of restatement. The measure the authors use for diversity is the presence of a female board director.

    The authors motivate their study based on the idea of “group-think,” which is a mode of thinking group members engage in when seeking consensus rather than pursuing other, possibly better courses of action. Gender diversity has been shown to decrease this tendency in groups and this paper tests whether that leads to better corporate governance when at least one board member is female.
     

    Design/Method/ Approach:

    The results of this study are based on firm restatements included in the GAO report from 1997 through 2002. All firms in the study were non-Fortune 1000 firms. The authors believe larger firms may have more pressure to have a “token” female board member and so this sample of smaller firms better represents the true effect of having a female present on the board. The authors matched a sample of firms with restatements with a control sample of firms that did not restate during the same period. The control firms were matched with a firm in the restatement sample as best as possible using characteristics such as market value of equity and industry code to ensure that they represented the best possible match for a similar firm that did not have to restate during the same time period.

    Findings:

    About 65 percent of firms in the sample had boards that did not include a single female director. Results from the study show a significant reduction in the likelihood of a financial restatement when the board contains at least one female board member. However, the authors admit that it may not actually be the female presence on the board that leads to a lower likelihood of restatements. For example, firms with better overall corporate governance may be more likely to appoint female board members for real or perceived benefits. Better corporate governance could drive both likelihood for restatement and the presence of a female board member.

    Category:
    Accountants' Reporting, Governance
    Sub-category:
    Board/Audit Committee Composition, Restatements
  • Jennifer M Mueller-Phillips
    Perceived Auditor Independence and Audit Litigation: The...
    research summary posted October 15, 2013 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.03 Non-Audit Services, 12.0 Accountants’ Reports and Reporting, 12.03 Restatements in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Perceived Auditor Independence and Audit Litigation: The Role of Nonaudit Services Fees
    Practical Implications:

    This study provides evidence to suggest that fees from audit clients, including NAS fees, which became publicly available under the SEC’s fee disclosure mandate, are used as evidence of auditor independence impairment and are a source of audit litigation risk. While specific NAS have been banned by SOX, substantial tax and other NAS fees continue to be cited as evidence in recent litigation. Thus, these findings document important links between SEC fee disclosure mandates, NAS-induced impairment arguments, and perceptions of audit quality in audit litigation.

    For more information on this study, please contact Jaime J. Schmidt.
     

    Citation:

    Schmidt, J. J. 2012. Perceived Auditor Independence and Audit Litigation: The Role of Nonaudit Services Fees. The Accounting Review 87(3): 1033-1065.

    Keywords:
    Auditor independence; nonaudit services fees; audit litigation; auditor settlements; financial statement restatements.
    Purpose of the Study:

    In audit litigation, the plaintiff attorneys (i.e., plaintiffs’ bar) often exploit and enhance the perception that fee dependence is related to an audit failure by arguing that economic pressure to retain fees and, in particular, nonaudit services (NAS) fees led to a conflict of interest for the auditor and compromised the auditor’s independence. The purpose of this study was to investigate whether audit litigants act as if they believe jurors will perceive that substantial NAS fees contribute to an audit failure through impaired auditor independence, and thus substandard auditor performance. The author examined the initiation and resolution of audit restatement-related litigation to provide evidence on whether NAS or another source of fee dependence (e.g., client importance, audit fee dependence) impairs perceived auditor independence.

    Design/Method/ Approach:

    The author collected information concerning restatements of previously audited financial statements disclosed from January 2001 through December 2007, the auditors involved with the restatements, and the amount of fees billed during the misstated time period. The author also identified all instances of litigation disclosed as of June 2008 against the restating companies. The author then estimated a model and ran a regression to investigate whether NAS fees are associated with the initiation of audit litigation following a restatement.

    Findings:
    • Restatement-related audit litigation is more likely when NAS fees are higher.
    • This association is driven by the unspecified (i.e., ‘‘other’’) fees component of NAS rather than by tax or financial information systems design and implementation (FISDI) fees.
      • The ratio of NAS fees to total fees is positively associated with the likelihood that audit litigation results from a restatement.
    • The association between audit fees or client importance and the likelihood of litigation is statistically insignificant.
    • A restatement-related lawsuit is more than seven times as likely to reach resolution by an auditor settlement and to settle at a greater amount when the plaintiffs’ bar argues that an auditor’s reliance on client fees resulted in an auditor independence impairment.
    • The plaintiff attorneys’ arguments about NAS fees and/or client importance are associated with greater likelihood and amount of settlement.
       
    Category:
    Accountants' Reporting, Independence & Ethics
    Sub-category:
    Non-audit Services, Restatements