Evulation of Audit Tenure, Industry Specialization, and Firm Size Affects Financial Restatements

Better Essays

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…

Agreeing with Davis, Myers, Rigsby, and Boone (2007) findings suggest that the longer the audit tenure is, the audit quality tends to be higher. Regarding prior research literature regarding industry specialization and financial restatements, Owhoso (2002) and Solomon (1999) findings suggest the relationship between industry specialization and the increase of audit quality. Finally, prior research literature regarding firm size and financial restatements show that Boone (2007) findings indicate a positive correlation between the two factors.

My research is different from the prior studies in the fact that the studies do not include earnings per share and return on assets in their testing. I believe both variables measure a firm’s profitability and its ability to generate cash. These two indicators allow for my results to indicate whether a firm’s financial statements are doing well and have not been restated based on the experimental variables. I believe that my findings have proved empirical evidence that longer auditor tenure and industry specialization are negatively associated with low audit quality. As for firm size, there is currently no correlation with low audit quality

Audits are meant to contribute to a company’s financials by bringing assurance that they are in accordance with GAAP. Auditors provide high quality audit opinions on a client and one

Get Access
Get Access