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How do auditors respond to accounting restatements? Evidence on audit staff allocation

Author

Listed:
  • Wuchun Chi

    (National Chengchi University)

  • Chien-min Kevin Pan

    (National Chengchi University)

Abstract

We examine how auditors respond to accounting restatements using audit input data from Japan. We find that audit fees, the number of Certified Public Accountant (CPA) licensed staff, and the number of signing partners are higher for firms in the restatement year than in the year prior to the restatement. Our results also reveal that the increase in audit fees and the higher numbers of CPA-licensed staff and signing partners persist after the restatement year. The results are robust after excluding dismissal of auditors subsequent to the occurrence of restatements. We further find that client firms are not able to gain a fee discount but will be audited by greater numbers of partners if they switch auditors after the restatement. We also obtain consistent results using propensity score matching. Overall, our findings suggest that audit firms increase audit inputs (i.e., higher fees and more experienced staff with a CPA license) in response to their own mistakes (i.e., accounting restatements). Taken together, the results suggest that the increased audit fees may reflect the increase in the risks, but not the risks alone.

Suggested Citation

  • Wuchun Chi & Chien-min Kevin Pan, 2022. "How do auditors respond to accounting restatements? Evidence on audit staff allocation," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 847-879, February.
    • Handle: RePEc:kap:rqfnac:v:58:y:2022:i:2:d:10.1007_s11156-021-01011-1
    DOI: 10.1007/s11156-021-01011-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Restatement; Misstatement; Audit inputs; Staff allocation;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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