The Effects of Restatements for Misreporting on Auditor Scrutiny of Peer Firms

Posted: 21 Jun 2018

See all articles by Feng Guo

Feng Guo

Iowa State University - Department of Accounting and Finance

Thomas R. Kubick

University of Nebraska-Lincoln

Adi Masli

University of Kansas - School of Business

Date Written: June 6, 2018

Abstract

Prior research contends that financial misreporting has a spillover effect on the outcomes of peer firms within the same industry through investment decisions, information risk, and shareholder wealth. We predict and confirm a higher level of audit fees for peer firms when serious misreporting by other firms is announced in the industry. We find this effect is limited to peers that exhibit poor internal control quality. In addition, we observe higher audit fees for peers of industry prominent misreporting firms and for peers of firms announcing restatements with larger negative market reactions. Overall, our results suggest that financial misreporting in the industry has a spillover effect on audit fees of non-misreporting peer firms.

Keywords: audit fees; audit services; auditing of financial reports; misreporting; restatements; spillover effects

JEL Classification: M42

Suggested Citation

Guo, Feng and Kubick, Thomas R. and Masli, Adi, The Effects of Restatements for Misreporting on Auditor Scrutiny of Peer Firms (June 6, 2018). Accounting Horizons, Vol. 32, No. 1, 2018, Available at SSRN: https://ssrn.com/abstract=3192215

Feng Guo

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Thomas R. Kubick

University of Nebraska-Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Adi Masli (Contact Author)

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

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