Financial restatements and auditor quality
This thesis examines the association between auditor quality and the likelihood of financial restatements for Australian listed companies. I focus on two types of restatements: error-based restatements, which are financial restatements to correct a prior-period error-based misstatement, and stealth restatements, which are restatements made without qualitative disclosures required by the regulation. I document that 32%, 23% and 1.9% of Australian listed companies made restatements, stealth restatements and error-based restatements respectively in my sample of 1,465 Australian listed companies in the 2012/2013 reporting period. I construct an Error Restatement Model and a Stealth Restatement Model to examine the effects of auditor quality and auditor quality changes on the likelihood of different types of restatements. I find some evidence that prior-period auditor quality, measured by whether an auditor is a Big 4 audit firm, is associated with a lower likelihood of a current-period error-based restatement. However, a change in auditor to a Big 4 audit firm (or to an industry specialist audit firm) is associated with a higher likelihood of an error-based restatement arising from the first year audit engagement. I find evidence that higher auditor quality, measured by whether an auditor is an industry specialist audit firm, is associated with a lower likelihood of a stealth restatement and that a change in auditor increases the likelihood of a stealth restatement, but no evidence that higher quality auditors are more effective at detecting or deterring client restatements without qualitative disclosures in first year audit engagements.
Networked Digital Library of Theses and Dissertations