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The purpose of this study is to explore the economic impact of financial restatements by major customers on the audit opinion of their suppliers, showing that non-financial information disclosure potentially helps auditors make better assessments.

Using a sample of China’s listed firms from 2007 to 2021, the authors aim to find the relationship between customers’ financial restatements and their suppliers’ audit opinions. Heckman selection model, placebo tests and other robustness checks are used as well.

The findings reveal that customers’ financial restatements have a significant effect on the likelihood of suppliers receiving modified audit opinions. This relationship is pronounced when suppliers face a higher level of financial constraints, exhibit poorer accounting conservatism or receive more negative media coverage. Additionally, this effect occurs through increased business risk and information risk, which heightens auditors’ perceived audit risk. Moreover, the study highlights the influence of switching costs, auditor expertise and restatement severity on this relationship.

Risks originating from customers can spread along the supply chain, emphasizing the necessity for auditors to give heightened attention to both the audited firms and their customer information. Moreover, regulators should carefully consider the important impact of customer information disclosures to maximize the protection of the interests of external information users.

This study not only confirms the crucial role of customer information disclosures in annual reports for stakeholders and auditors but also contributes to the existing literature on customer–supplier relationships.

The purpose of this study is to investigate the association between nonaudit services (NAS) and out-of-period adjustments (OOPAs). Over the years, the number of OOPAs has risen while the number of restatements has decreased. This could indicate an improvement in financial reporting quality. It could also indicate the use of a type of stealth restatement for opportunistic purposes. These less prominent restatements are more likely to go undetected and could perpetuate opportunistic disclosure and mitigate the likelihood of unfavorable market reactions.

The authors use a two-stage multivariate regression analysis to examine the relationship between NAS and the reporting of an OOPA. The authors use prior research on NAS to guide the model development. The authors perform several robustness checks including different types of NAS and different characteristics of OOPAs.

The results indicate that NAS has a significantly negative association with the existence of OOPAs. The core findings suggest that NAS does not impair auditor independence. Rather, greater amounts of NAS may contribute to knowledge spillover, which leads to higher financial reporting and audit quality. The results are robust to several additional tests.

The results raise interesting implications for regulators, executives, auditors, investors and future research. The authors provide insight into the relationship between NAS and auditor independence.

To the best of the authors’ knowledge, prior research has not considered the effect of NAS on OOPAs. The authors contribute to the literature by providing evidence that OOPAs, a form of stealth restatements, is an important consideration in audit quality research.

We investigate how firms’ responses to misconduct change when the institutional environment becomes more stringent. Organizational theory offers conflicting perspectives on whether new legislation will increase or decrease pressure on firms to take remedial action following misconduct. The dominant perspective posits that new legislation increases expectations of firm behavior, amplifying pressure on them to take remedial action after misconduct. A more recent perspective, however, suggests that the mere necessity to meet more stringent regulatory requirements certifies firms as legitimate to relevant audiences. This certification effect buffers firms, reducing the pressure for them to take remedial action after misconduct. Using a temporary, largely arbitrary exemption from a key provision of the Sarbanes-Oxley Act, we show that firms that were not required to meet all the regulatory standards of good governance it required became 45% more likely to replace their CEOs following the announcement of an earnings restatement after Sarbanes-Oxley. On the other hand, those that were required to meet all of Sarbanes-Oxley’s provisions became 26% less likely to replace their CEOs following a restatement announcement. Ironically, CEOs at firms with a legislative mandate intended to increase accountability for corporate misconduct shoulder less blame than do CEOs at firms without such legislative demands.

This paper aims to examine the link between audit(or) type and restatements in Egypt, a complex and multifaceted auditing market. The usual big 4 versus non-big 4 comparison is insufficient as Egypt has a unique mix of private audit firms, one governmental agency (Accountability State Authority) and mandatory/nonmandatory audit services, including single, joint and dual audits.

The study uses a sample of listed companies in Egypt and analyzes the impact of auditor type and audit type on explicit, implicit and total restatements. The study uses logistic regression model to examine the underlying relationship.

Results show no relationship between auditor type and audit quality, positive association between non-big foreign CPA firms and total/implicit restatements and mixed results for the impact of dual audits on audit quality. The study found no link between auditor type and audit quality in Egypt. Egyptian audit firms linked to non-big 4 foreign Certified Public Accounting firms were positively linked to total and implicit restatements. Joint audits did not improve audit quality and were directly related to total and explicit restatements. Dual audits showed mixed results, positively associated with implicit restatements but inversely associated with explicit restatements.

The study provides valuable insights into the complexities of the auditing market in emerging markets and offers valuable insights for stakeholders in the financial statement users, audit firms and governmental agencies.

The purpose of this study is to examine the effects of chief financial officer (CFO) gender, board gender diversity and the interaction of both factors on financial reporting quality (FRQ) proxied by restatements.

Restatements indicate inaccurate financial reporting. The authors use fixed effects conditional logistic regression models to compare firms with and without restatements matched by size, industry and year. The authors’ unique matched–pair sample consists of 546 listed US firms from the period 2005–2016.

The authors’ results provide evidence that restatements are less likely when the CFO is a woman and when a higher proportion of women serve on the board of directors (BOD). Considering the interaction effects, the authors find evidence that women on the BOD are more effective at reducing restatement likelihood when the CFO is also a woman. And that although female CFOs reduce restatement likelihood generally, they have no statistically significant effect on restatement likelihood when the BOD is all-male.

To the best of the authors’ knowledge, this study is the first that the authors know of to consider how FRQ is affected by the interaction effects of CFO gender and board gender diversity. The findings corroborate upper echelons theory and extend the understanding of the effects of managerial gender diversity at a time when firms face growing pressure to increase gender diversity at the highest levels. The unique sample, methodology and findings provide new insights into the impact of gender on FRQ that has important policy implications.

This paper aims to enrich the scope of the influence of media reports on the stock risk, and it also provides a path to support the research on the relationship between media reports and idiosyncratic risks in the stock market.

The authors select financial restatement samples of listed companies in China from Jan 2015 to Dec 2017 to explore the impact of the financial restatement on the idiosyncratic risk of stocks. Further, the financial restatement that has more media attention may play a more significant role in promoting the idiosyncratic risk.

The authors found that the financial restatement of listed companies has a significant positive effect on the idiosyncratic risk of stocks. Specifically, the idiosyncratic risk changed five months before the restatement. After the restatement, the idiosyncratic risk increased by 83.47 in five days then decreased slowly, which lasted about one year. The restatement caused by sensitive issues and legal issues has a greater impact on the idiosyncratic risk. Both current restatement and delayed restatements will increase the idiosyncratic risk of stocks, but the impact of the latter is higher than the former.

Possible deficiencies in the paper are that the number of restatements caused by major accounting errors is low. Therefore, no regular conclusions were drawn on the impact of the financial restatement caused by major accounting errors.

The conclusions provide a basis for targeted supervisory measures on the restatements of listed companies. The increase in financial restatements is closely related to the lack of governance mechanisms in the stock market. For investors, although the mystery of idiosyncratic volatility exists significantly in the market, the company's valuation level will affect the relationship between the idiosyncratic risk and expected return. Investors should pay attention to the intrinsic value of the company and should not blindly pursue stocks with a low idiosyncratic risk.

These conclusions may enrich the scope of the influence of media reports on the stock risk and also provide a path to support the research on the relationship between media reports and idiosyncratic risks in the capital market.

This study reviews and discusses the accounting literature that analyzes the role of auditors and enforcers in the context of fraud.

This literature review includes both qualitative and quantitative studies, based on the idea that the findings from different research paradigms can shed light on the complex interactions between different financial reporting controls. The authors use a mixed-methods research synthesis and select 64 accounting journal articles to analyze the main proxies for fraud, the stages of the fraud process under investigation and the roles played by auditors and enforcers.

The study highlights heterogeneity with respect to the terms and concepts used to capture the fraud phenomenon, a fragmentation in terms of the measures used in quantitative studies and a low level of detail in the fraud analysis. The review also shows a limited number of case studies and a lack of focus on the interaction and interplay between enforcers and auditors.

This study outlines directions for future accounting research on fraud.

The analysis underscores the need for the academic community, policymakers and practitioners to work together to prevent the destructive economic and social consequences of fraud in an increasingly complex and interconnected environment.

This study differs from previous literature reviews that focus on a single monitoring mechanism or deal with fraud in a broadly manner by discussing how the accounting literature addresses the roles and the complex interplay between enforcers and auditors in the context of accounting fraud.

To complete this case, students will need to access financial statements from the Securities and Exchange Commission’s webpage. The links are provided. Students will also need to review the conceptual framework that is typically covered in Intermediate 1 to respond to question 5.

This case is based on the three financial statement restatements that Weatherford International Ltd. made over an approximately 18-month period. The restatements were due to a fraud committed by manipulating the income tax accrual in the financial statements. The manipulation used was to overstate the amount of income used to calculate the dividend exclusion and then use a relatively high tax rate to calculate the resulting tax benefit. The tax rate used for the fraud was substantially more than Weatherford’s effective tax rate (ETR), which was a prominent part of the company’s strategic growth plan. The tax senior with the external auditors who reviewed the entry made for the dividend exclusion captured the inconsistency with the comment that “This [the entry] deserves a huh?” The case is intended for students in Intermediate 2, where financial statement restatements and their effect on the company’s financial statements are typically covered. During the years covered in this case, Weatherford was also under investigation for violations of the Foreign Corrupt Practices Act (FCPA). Weatherford’s FCPA violations included multiple instances of bribery, the inappropriate use of volume discounts, improper payments and kickbacks in the United Nation’s Oil for Food program. Weatherford received the eighth-largest fine in the history of FCPA violations (at that time) of $152m. Weatherford’s FCPA investigation expanded, and the company paid another $100m in fines for violations of sanctions law and export control law. This case focuses only on the fraudulent manipulation of the financial statements through the tax accrual and does not delve into the other investigations. However, the linkage between those investigations and the fraud in this case is Weatherford’s nonexistent internal controls.

This case was designed to be used in Intermediate 2 financial accounting classes to highlight financial statement restatements and review the conceptual framework and materiality. The students who used the case did not have difficulty with the tax aspect of the case. However, most of the students had taken one tax class previously or concurrently. If students have not had any exposure to tax, the instructor might want to walk students through the tax aspects of the case.

This study aims to investigate the busy season contagion effects on other clients of the Big 4 auditor’s local office associated with the non-timely (NT) filing(s) by large accelerated filer (LAF) client(s) of the office. Specifically, the authors examine the influence such events have on the audit quality and timeliness of other clients of that office.

Using panel data of annual NT filings of LAF clients between 2006 and 2019, the authors apply the ordinary least squares regression technique to model audit reporting lag (ARL) and the logistic regression technique to model the probability of restatements.

Controlling for audit firm, industry and year-fixed effects, the authors find that a LAF NT filing reduces audit quality and audit timeliness of other clients of the office, as measured by restatement risk and ARL. The impact on ARL is most pronounced on the medium and small clients within the office. The deteriorated audit quality is observed for medium clients.

The results of this study have practical implications for auditors and regulators. They reveal the contagion effect in the auditor’s local office with the NT LAF client. The main limitation of the study is the lack of staffing utilization data to allow for drawing conclusions on causality.

To the best of the authors’ knowledge, this is the first study to document the contagion effect of NT filings of LAF clients conducted at the auditor’s local office level.

This study aims to explore the relation among US audit partners’ characteristics, their career advancement and audit quality.

This study uses data from Public Company Accounting Oversight Board Form AP, Auditor Reporting of Certain Audit Participants, and publicly available online data sources. The hand-collected data on audit partners’ personal characteristics include gender, work experience and educational background. The measures for audit quality include restatements and audit fees.

The authors find that audit partner characteristics matter for the time it takes an individual to reach partnership after completing a bachelor’s degree. There are significant differences in work experience and educational background between partners in the largest (Big N) audit firms and smaller (non-Big N) audit firms. Audit partner traits are related to audit quality, and the effects differ between Big N and non-Big N partners.

The literature has examined audit partners’ career paths using international data. However, little empirical academic research has examined the career advancement of US audit partners. This study provides initial insights on the career advancement of US partners on a large scale and complements the recent research that examines audit partner characteristics and audit quality in the US market.