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Client restatement announcement, audit office human capital investment, and audit quality improvements

Daniel Aobdia, Xuejiao Liu, Ke Na and Hong Wu

Journal of Accounting and Economics, 2025, vol. 79, issue 2

Abstract: This paper examines audit offices’ human capital investment in response to client restatement announcements and the resulting effects on audit quality and audit office client base. We find that audit offices attempt to acquire human capital and talent by posting more audit-related job positions just after a client announces a restatement. The increase in job postings follows restatements with more negative announcement returns and restatements of annual financial statements, and is concentrated among more senior and experienced positions. Importantly, the increased job postings are not driven by replacement hiring due to individual auditor departures and reflect more auditors joining the office. These human capital investments reduce future client misstatements and losses in client portfolios, indicating improvements in actual and perceived audit quality. Audit offices are also more likely to replace audit managing partners and prevent the signing partners of the misstated financial statements from signing new audit reports after restatement announcements.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:79:y:2025:i:2:s0165410124000715

DOI: 10.1016/j.jacceco.2024.101741

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Journal of Accounting and Economics is currently edited by J. L. Zimmerman, S. P. Kothari, T. Z. Lys and R. L. Watts

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