This study investigates the relation between audit effort (measured using audit fees) and financial report misstatements (measured using restatements). Although theoretical work predicts a negative relation between audit effort and misstatements, extant empirical research fails to document such a predicted negative relation. We identify two research design issues that explain the inconsistency between the theoretical prediction and empirical findings. First, auditor risk adjustment behavior induces an upward bias in the association between audit fees and restatements. Second, the theoretical prediction applies only to audited financial reports (10-Ks) and not to unaudited reports (10-Qs). Comingling restatements of audited with unaudited reports introduces an additional upward bias in the association between audit fees and restatements. After correcting for these two sources of bias, we document a robust negative association between audit fees and annual restatements, consistent with the interpretation that higher audit effort decreases the probability of misstatements. These results apply to misstatements resulting from both intentional and unintentional accounting improprieties. Additionally, we fail to find evidence that Big N auditors are more capable of detecting misstatements than non-Big N auditors.
| Speaker: | Dr Gerald LOBO Arthur Andersen Chair Professor in Accounting, University of Houston (SMU, Cheng Tsang Man Chair Visiting Professor) |
| When: |
3.30 pm - 5.00 pm |
| Venue: | School of Accountancy [Map] Level 4, Meeting Room 4.1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |
