Financial Restatements, Audit Fees, and the Moderating Effect of CFO Turnover

Feldmann, Dorothy; Read, William J.; Abdolmohammadi, Mohammad J.

doi:10.2308/aud.2009.28.1.205

Cited by 97 publications

(84 citation statements)

References 46 publications

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“…On the other hand, the following model testing H2a and H2b is based on Raghunandan and Rama (2006), R. Hoitash, U. Hoitash, and Bedard (2008), Krishnan, Rama, andZhang (2008), Feldmann, Read, andAbdolmohammadi (2009) The definitions of all variables used in Models (1) and (2) are shown in Table 1. An indicator variable equal to 1 if the firm discloses a material weakness in year t, and 0 if otherwise.…”

Section: Modelsmentioning

confidence: 99%

The Effect of Audit Objectives on Audit Quality—Why is There Little Disclosure of Significant Deficiencies in Japanese Internal Control Audits?

Uemura¹

2016

JMAA

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Many prior research findings indicate that audit quality differs between the Big 4 and non-Big 4 audit firms using an indicator variable. However, most previous research focuses on only outcome measures, such as audit fees, going concern reports, and non-audit services. This study investigates audit quality differentiation between the Big 4 and non-Big 4 audit firms hypothesis from an audit objective point of view. One of the material objectives of Japanese internal control audit institutions is to facilitate assessment and improvement of internal controls by corporations themselves. The findings of this study indicate that the Big 4 audit firms accomplish this objective better than non-Big 4 audit firms. Consequently, most Big 4 clients do not disclose significant deficiencies (SDs), implying that they improve the quality of internal controls through internal controls auditing. This paper concludes that Big 4 firms produce a higher audit quality level than non-Big 4 firms, and this quality difference is related to how an audit objective is interpreted and implemented.

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Section: Modelsmentioning

confidence: 99%

The Effect of Audit Objectives on Audit Quality—Why is There Little Disclosure of Significant Deficiencies in Japanese Internal Control Audits?

Uemura¹

2016

JMAA

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“…Specifically, the earnings response coefficients for earnings announcements surrounding restatements exhibit a U-shaped pattern in which they are no longer significantly lower in the post-restatement period over an average of four quarters. More recently, Feldmann et al (2009) suggest that audit fees are higher for restating firms as compared to their counterparts. They argue that there is a positive relationship between audit fees and financial restatements.…”

Section: Prior Literaturementioning

confidence: 99%

Abnormal audit fees and future restatements: evidence from Tehran Stock Exchange

Salehi

Farhangdoust

Vahidnia

2017

IJAAPE

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Abstract:The aim of this paper is to provide empirical evidence for the impact of abnormal audit fees on future restatements. We examine whether firms that restate their financial statements have higher levels of total audit fees than their counterparts. In this regard, the authors test their hypothesis by performing panel data analysis on a sample of 936 firm-year observations from companies listed on the Tehran Stock Exchange during 2009-2014. We find that there is a negative relationship between the two; specifically, abnormal audit fees are lower in the periods leading up to the occurrence or announcement of the restatement (i.e., the next fiscal year).

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“…Munsif, Raghunandan, Rama, & Singhvi (2011) show that firms that remediate SDs have lower audit fees than firms that continue to report them, and Hoag & Hollingworth (2011) show that audit fees decline for companies that remediate SDs. Feldmann, Read, & Abdolmohammadi (2009) find that replacing the CFO moderates subsequent increases in audit fees for corporations that modified and restated their financials (Note 22). Several empirical studies link fees with auditors' perceptions of clients' control risks (Hay, Knechel, & Wong, 2006).…”

Section: Additional Analysismentioning

confidence: 99%

“…Several empirical studies link fees with auditors' perceptions of clients' control risks (Hay, Knechel, & Wong, 2006). In short, previous research suggests that the disclosure of a SD increases audit fees (Note 23) and that auditors moderate fee increases if they believe that replacing the CEO and board members reduces control risks (Feldmann, Read, & Abdolmohammadi, 2009). However, this study's results suggest that replacing the CEO does not inherently remediate SDs by improving internal controls.…”

Section: Additional Analysismentioning

confidence: 99%

Effects of CEO Turnover and Board Composition Reform on Improvements in the Internal Control Quality

Uemura¹

2018

IJFR

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Several serious accounting scandals have occurred in Japan in recent years (e.g., Olympus); however, the government, regulators, and auditing standard setters have struggled to identify new directions for corporate governance in listed companies, such as standard setting to address risks of fraud in an audit or the adoption of new corporate governance codes. The validity and effectiveness of monitoring by outside directors have received criticism within such a context. Nevertheless, in 2015, accounting fraud at Toshiba was discovered, which surprisingly involved upper management; the outside directors had failed to detect and prevent this fraud. Again, the monitoring function of the Japanese board of directors and outside directors was viewed with suspicion. Thus, this study examines Japanese corporations that disclose significant deficiencies (SDs) in internal controls over financial reporting (ICFR) and determines whether replacing the chief executive officer (CEO) and enhancing board members' independence and financial expertise are followed by SD remediation. The results indicate that Japanese companies that disclose SDs in ICFR are more likely to replace their CEOs and enhance board independence. In addition, this study finds that although these actions do not affect SD remediation, upgrading the board's accounting expertise does correlate positively with SD remediation. Moreover, if a company remediates a SD by increasing the number of accounting experts on the board, an increase in audit fees during the following term can be mitigated. These findings should be of interest to Japan's regulators, auditing standard setters, and financial statement users when considering improvements in the quality of internal controls. In particular, these individuals must realize that the control environment is not improved in Japanese firms merely by replacing the CEO and increasing board independence, particularly because new CEOs encounter difficulties in changing the environment established by their predecessors.

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Financial Restatements, Audit Fees, and the Moderating Effect of CFO Turnover

Cited by 97 publications

References 46 publications

The Effect of Audit Objectives on Audit Quality—Why is There Little Disclosure of Significant Deficiencies in Japanese Internal Control Audits?

The Effect of Audit Objectives on Audit Quality—Why is There Little Disclosure of Significant Deficiencies in Japanese Internal Control Audits?

Abnormal audit fees and future restatements: evidence from Tehran Stock Exchange

Effects of CEO Turnover and Board Composition Reform on Improvements in the Internal Control Quality

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