Third-party auditor liability and financial restatements

Ahmed Al-Hadi, Grantley Taylor, Mostafa Monzur Hasan, Baban Eulaiwi

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

We examine whether U.S. state-level third-party auditor liability (TPAL) regimes affect firms’ financial restatement decisions. Using a sample of 34,409 firm-year observations from 2003 to 2018, we find that state-level TPAL is significantly negatively related to the likelihood of firm-level financial restatements. We also observe that the negative relationship between TPAL and financial restatements persists for a subsample of firms with income-increasing financial restatements and the ‘restatement of torts standard’ (one of the more expansive subgroups of TPAL). Using a difference-in-differences regression design, we find that an increase in state-level TPAL regimes strengthens the negative relationship between TPAL and the incidence of restatements. Our main finding remains robust across several sensitivity tests. Finally, we find that the negative relationship between TPAL and restatements is more pronounced when firms are subject to greater litigation risk and when firms are audited by non-specialist auditors. Overall, we show that TPAL has important implications for client firms’ financial restatements.
Original languageEnglish
Article number101084
Pages (from-to)1-23
Number of pages23
JournalThe British Accounting Review
Volume55
Issue number2
Early online date18 Feb 2022
DOIs
Publication statusPublished - Mar 2023

Keywords

  • Auditor liability
  • Financial restatement
  • Litigation risk

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