Financial restatement and auditor dismissal

Chen Ma, Junrui Zhang and Bei Yang

China Journal of Accounting Studies, 2015, vol. 3, issue 3, 209-229

Abstract: This study extends the prior literature by examining the incidence of auditor dismissal in China in the year following the restatement announcement and asks whether the direction of auditor turnover is affected by financial restatement. We document a higher likelihood of auditor dismissal in the 12-month period following the restatement announcement for restating firms than for non-restating firms. Additionally, we test the effect of financial restatement on the direction of auditor turnover. Although we find there exists no significant relationship between restatement and the direction of auditor turnover, we do find that restating firms are more likely to replace the incumbent auditor with a reputable auditor following a fraud-related restatement announcement, and that restating firms are more likely to replace the incumbent auditor with a more acquiescent auditor following an error-related restatement announcement. Our findings confirm the argument of ‘restoring reputation’ for a fraud-related restatement, and that of ‘seeking acquiescence’ for an error-related restatement.

Date: 2015
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DOI: 10.1080/21697213.2015.1070043

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