The effect of restatements on office-level audit quality

Abstract

Purpose This study aims to provide evidence on how the issuance of a nonreliance restatement affects non-restating clients of the same audit office. Design/methodology/approach To test the effect of restatement issuance on office-level quality, this study runs regressions using both input- and output-based measures of audit quality. Findings This study finds that in the years where one or more clients of an audit office issue a restatement, audit effort is lower for non-restating clients of the same office. When two or more clients issue a restatement, other clients are charged lower audit fees, file later and are more likely to experience an audit failure. Originality/value This study contributes to the literature on office-level audit quality and provides an explanation for the longitudinal correlation of office-level audit failures.