Higher Audit Quality and Higher Restatement Rates: An Examination of Big Four Auditee Restatements

Financial Restatement Period: Internal and External Auditing Mechanism

“…Our findings align with the prior research by Rowe (2018), which defines that Audit Quality (BIG4) will extend the restatement period. Nevertheless, it is contradicted with prior research conducted by Schmidt and Wilkins (2013), Francis et al (2013), Zhizhong et al (2011), Jiang et al (2015, Lobo (2013), and Kusuma and Rohman (2014) which present that Audit Quality (BIG4) will reduce the restatement period.…”

“…Previous studies of Schmidt and Wilkins (2013), Francis et al (2013), Zhizhong et al (2011), Jiang et al (2015, Lobo (2013), and Kusuma and Rohman (2014) pointed out that high audit quality reduces restatements. However, the study of Rowe (2018) did not provide supportive evidence.…”

“…Several empirical studies by Francis et al (2013), Rowe (2018), Zhizhong et al (2011), Jiang et al (2015, Lobo (2013), Kusuma and Rohman (2014), and Hasnan and Hussain (2015) found a significant negative association between audit quality and financial restatements. Meanwhile, the study of Rowe (2018) did not find relative evidence. Previous studies by Blankley et al (2015) and Wei et al (2017) concluded that the audit report lag in a corresponding period decreases the probability of subsequent restatements in the following year.…”

The Impact of PCAOB Auditing Standard No. 5, the PCAOB Inspection Regime, and the Great Recession on Audit Fees and Audit Quality

“…It is a top-down, risk-based approach to audits of internal control over financial reporting for accelerated filers (PCAOB, 2007a(PCAOB, , 2007b. Its promulgation coincided with a stricter, more efficient and focused PCAOB inspection regime that was intended to increase audit quality through improved audit firm quality controls (PCAOB, 2008;Rowe & Sivadasan, 2018). At the same time, the Great Recession led clients to pressure audit firms to reduce fees (Ettredge et al, 2014).…”

“…The short (less than 1 year) implementation period would have delayed audit quality improvements into the second year. Concurrently, the PCAOB's oversight changed to a stricter approach that sanctioned one Big Four firm and publicized inspection details that permit the computation of an ''audit failure rate'' (Rowe & Sivadasan, 2018). In response to the AS5 mandate and the PCAOB's stricter oversight, several Big Four firms introduced improvements (Deloitte, 2010;KPMG, 2009;PCAOB, 2013).…”