Restatements and Auditors' Reputational Costs
Posted: 2 Dec 2008
Date Written: December 2, 2008
Abstract
This study examines the effect of a restatement on auditor's reputation as evidenced by any changes in the market value of the auditor's clients and the audit fees in the subsequent year. We find that firms sharing the same auditor as the restatement firms report a negative abnormal return during the restatement announcement window. Further, this negative abnormal return is positively correlated with the abnormal return of the restatement firm, which proxies for the severity of the restatement. Our results also suggest that if the auditor is a specialist in the restatement firm's industry and the non-restating firm also happens to be in this industry, then the non-restating firm suffers an incremental drop in market value. However, this incremental drop is limited to specialist auditors only. We also observe a significant decline in the audit fee of non-restating clients of the auditors in question, for the year following the restatement announcement. The decline in market value and audit fees, however, is confined to the Big 4 clients.
Keywords: restatement, auditor, reputation
JEL Classification: M49, G14, M41, M43
Suggested Citation: Suggested Citation