Audit pricing of restatement severity in the announcement year: the moderating effects of client management changes and specialist auditors

Purpose - This paper aims to examine the audit pricing of restatement severity in the year of restatement announcement and how client management changes and auditor industry specialization moderate such pricing for a sample of restating firms. Design/methodology/approach - The sample consists of restating firms without auditor changes in the year of restatement announcement in the USA from 2005 to 2020. Restatement severity is measured by nine measures, which are further grouped into four categories. An audit fee model is used to investigate whether audit fees are higher for more severe restatements. Interaction terms involving the four categories of severity measures and a dummy variable for top management changes and for industry specialists are used to study the moderating effects. Findings - This paper reports that audit fees are higher for more severe restatements (those that are more serious in nature, pervasive, unfavourable in financial impact and relevant to auditors) and even higher for clients with top management changes. However, audit fees are not always higher for specialist auditors. The results show that, for auditors who are specialists, audit fees are higher for restatements that are more serious in nature but lower for those that are more pervasive. Originality/value - Prior studies examine audit pricing of restatement or restatement severity one or two years after restatement announcement. In contrast, this paper studies audit pricing of restatement severity in the year of restatement announcement because clients and auditors are likely to renegotiate audit fees for restatement as early as possible and if the pricing issue is studied after the announcement year, noisy results may be obtained due to factors arising solely after that year. Also, in contrast to prior studies that do not investigate the moderating effects of clients’ and auditors’ characteristics on the pricing issue, this paper studies the effects of client management changes and auditor industry specialization on the issue and, thus, recognizes the contextual nature of the issue.