Uninvolved: Effects of Misstatement-Independent Auditor Oversight

Date
2021
Authors
Gomez, Pedro
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Abstract
Researchers in prior studies assume the current auditor is responsible for misstated financials or attempt to perform filtering to assign responsibility. However, for a minimally filtered sample of restatements within Audit Analytics, 20 percent of the restatements annually correspond to cases where the auditor engaged at the time of a restatement announcement was not engaged during the misstatement period. I refer to these observations as uninvolved. Using a similar model from prior literature, I find that companies with involved audit firms are negatively associated with the abnormal return around the restatement announcement. Following the restatement announcement, companies with uninvolved audit firms have a lower likelihood of experiencing audit turnover, and uninvolved auditor departures are characterized by a positive abnormal market reaction around the departure date. These findings suggest that involvement is an informative dimension to the market and is associated with different audit outcomes.
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Keywords
audit quality, audit firm reputation, restatements, market reactions to misstatements, audit firm turnover, audit firm turnover market reactions
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