Restatements and Auditors' Reputational Costs

Posted: 2 Dec 2008

See all articles by Hiu Lam Choy

Hiu Lam Choy

Drexel University

Ferdinand A. Gul

Monash University Sunway Campus

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

Choy, Hiu Lam and Gul, Ferdinand A., Restatements and Auditors' Reputational Costs (December 2, 2008). Available at SSRN: https://ssrn.com/abstract=1310166

Hiu Lam Choy (Contact Author)

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

Ferdinand A. Gul

Monash University Sunway Campus ( email )

Jalan Lagoon Selatan
Selangor Darul Ehsan
Bandar Sunway, 46150
Malaysia

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
2,473
PlumX Metrics