How do Auditors Respond to Accounting Restatements? Evidence on Audit Staff Allocation

Abstract

This paper examines how auditors respond to accounting restatements using Japanese audit input data. 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 the year prior to the restatement. Our results also show that the increase in audit fees and the higher numbers of CPA licensed staff and signing partners persists after the restatement year. Overall, our findings suggest that audit firms charge higher fees and assign more experienced staff in response to accounting restatements, implying that we can attribute part of the increased audit fees to increased efforts, not the risk premium alone. We believe that ours is the first study to document auditors increase the numbers of licensed staff and signing partners in response to their own responsibilities (i.e., a restatement could result from a previously failed audit).