Shopping for Accounting Accruals and Restatements

Wen-Ching Chang and Yahn-Shir Chen

Emerging Markets Finance and Trade, 2017, vol. 53, issue 3, 554-562

Abstract: We examine whether companies change their auditor to shop for accounting accruals and whether these shopped accruals are related to financial restatements. The results show that the negative discretionary accruals audited by successor auditors (1) are significantly higher than those audited by predecessor auditors and (2) increase the likelihood of income-decreasing restatements, suggesting understatements for these shopped negative discretionary accruals. These results are salient in companies switching from a Big 4 to a non-Big 4 auditor. Overall, companies shop for accounting accruals successfully, especially from a Big 4 to a non-Big 4 auditor, and consequently restate downward their reported earnings.

Date: 2017
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DOI: 10.1080/1540496X.2015.1095564

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