Uninvolved: Effects of Misstatement-Independent Auditor Oversight

Gomez, Pedro
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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.
audit quality, audit firm reputation, restatements, market reactions to misstatements, audit firm turnover, audit firm turnover market reactions
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