Faculty Scholarship 1994 - Present

How Does the Distinction between Errors and Irregularities Impact Audit Risk Evidence from Restatement

This study examines auditors perception of audit risk after the announcement of different financial restatements. We examine two classifications of restatement: Errors (unintentional mistakes) and irregularities (intentional mistakes). With a sample of restatement firms from 2001 to 2006, we find that generally the audit fees in the post-restatement periods are significantly higher than those in the pre-restatement periods. And the higher audit fees last for at least three years after restatement announcements. When considering the causes of restatements, the audit fees would increase significantly faster for the companies with irregularities than errors. In addition, the auditor turnover in the year following restatement is significantly higher than other years. And the turnover rate is significantly higher for the companies with restatements by irregularities than errors. Accordingly, the empirical results imply that auditors perceive a higher level of audit risk for restatement firms. And they treat restatements caused by errors and irregularities differently.