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…

Not only do these effects occur immediately after the announcement of a restatement, but there could be long-term effects as well, tarnishing the reputation of an audit firm if it affects a big client.

I used restatements as my dependent variable. Here, RESTATE is coded 1 for each firm-year a company restated its financials, and 0 otherwise.

Auditor Tenure TENURE will be one of my experimental variables. This variable is measured using the natural log of years the audit firms audit their clients. Using auditor data from COMPUSTAT database, we use tenure to determine the number of years the auditor has been working with the client from the original issued financial statement to the years up to/ after the financial restatement.

Industry Knowledge Here, EXPERT is my second experimental variable. I used relative specialization as an indicator for industry expertise. According to Abbott and Parker (2000), relative specialization produces “effective” results in identifying which auditor had the biggest impact on the auditing client. To have industry knowledge, the auditing firm must audit clients with the top sales revenue in their

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