Audit Tenure, Industry Specialization, and Firm Site Affect on Financial Statements

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The objective of this study is to evaluate audit tenure, industry specialization, and firm size and its correlation to financial restatements. A client’s restatements suggest low audit quality because it indicates that the client’s financial statements are not in line with GAAP. I analyzed a sample of 250 firm-year restatements from public companies during 2008 to 2012. I gathered the data using COMPUSTAT and AuditAnalytics. For my results, I have found that auditor tenure has a negative correlation with financial restatement. I also found that industry expertise has a negative correlation with financial restatements. Further, it appears that firm size has no correlation with financial restatements. In conclusion, it turns out my …show more content…
The objective of this study is to evaluate audit tenure, industry specialization, and firm size and its correlation to financial restatements. A client’s restatements suggest low audit quality because it indicates that the client’s financial statements are not in line with GAAP. I analyzed a sample of 250 firm-year restatements from public companies during 2008 to 2012. I gathered the data using COMPUSTAT and AuditAnalytics. For my results, I have found that auditor tenure has a negative correlation with financial restatement. I also found that industry expertise has a negative correlation with financial restatements. Further, it appears that firm size has no correlation with financial restatements. In conclusion, it turns out my results of auditor tenure and industry specialization are in line with my hypothesis that these two indicators correlate negatively with financial restatements. As for, firm size, there is no correlation with firm statement restatements.

Sarbanes Oxley section 404 requires companies to have independent auditors who evaluate their internal control systems and financial reports. These independent auditors must account for this in their audit report for the general public, including investors of the company. Although an audit firm can follow the General Accepted Auditing Standards and reflect the proper assurance in their audit work, there could be an instance where the client still has a financial restatement. As stated before,