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Financial restatement and auditor dismissal

Author

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  • Chen Ma
  • Junrui Zhang
  • Bei Yang

Abstract

This study extends the prior literature by examining the incidence of auditor dismissal in China in the year following the restatement announcement and asks whether the direction of auditor turnover is affected by financial restatement. We document a higher likelihood of auditor dismissal in the 12-month period following the restatement announcement for restating firms than for non-restating firms. Additionally, we test the effect of financial restatement on the direction of auditor turnover. Although we find there exists no significant relationship between restatement and the direction of auditor turnover, we do find that restating firms are more likely to replace the incumbent auditor with a reputable auditor following a fraud-related restatement announcement, and that restating firms are more likely to replace the incumbent auditor with a more acquiescent auditor following an error-related restatement announcement. Our findings confirm the argument of ‘restoring reputation’ for a fraud-related restatement, and that of ‘seeking acquiescence’ for an error-related restatement.

Suggested Citation

  • Chen Ma & Junrui Zhang & Bei Yang, 2015. "Financial restatement and auditor dismissal," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 3(3), pages 209-229, July.
    • Handle: RePEc:taf:rcjaxx:v:3:y:2015:i:3:p:209-229
    DOI: 10.1080/21697213.2015.1070043
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