Auditor Industry Specialization, Auditor Changes And Accounting Restatements

Since mid-90s of the20thcentury，more and more attention has been paid on financialrestatements by the regulators and academics. Through reviewing existing literature aboutfinancial restatements，we find that the focus of current research is on the relationshipbetween corporate governance mechanisms and financial restatements. However as animportant corporate governance mechanism，there are few studies to research the relationshipbetween audit and financial restatements. On the base of auditor industry specialization, thisarticle will extinguish the effect that external auditors make on financial restatements, andanalyst deeply on the role of accounting firms in the process of financial restatements. It notonly helps to prevent the occurrence of financial restatements，but also helps us understandand play the role of external corporate governance of audit.In this research, listed companies that occurred financial restatement from2008to2010are the samples. Then we do empirical research on the relationship between auditor industryspecialization, auditor changes and financial restatement. It refers the Logistic model,nominates the financial restatement as dependent variable, and auditor industry specialization,auditor changes as explanation variables. Then it does research on whether accounting errordraws attention from CPA. We intend to test the following two questions: the impact ofauditor industry specialization on the likelihood of financial restatement; relationship betweenauditor changes and financial restatement. At last, it concludes some meaningful advice forregulate department and accounting firms.This dissertation finds that auditor industry specialization is negatively associated withthe likelihood of accounting restatement. In addition, focusing on the subset of restatementfirms, we find that auditor industry specialization reduces the likelihood of issuingrestatements affecting core operating accounts, suggesting that industry specialization addsvalue in auditing a particularly critical area of the firms’ continuing operations. Finally, wefind changing from a non-specialist to a specialist auditor increases the likelihood ofrestatement, and changing from a specialist to a non-specialist reduces the likelihood ofrestatement. Our findings are consistent with industry specialization enhancing auditors’ rolein improving the quality of the financial reporting process, particularly related to the coreoperations of their clients. The main contribution of this research is that it examines the relationship betweenauditor industry specialization, auditor changes and financial restatement. Moreover, in thenew accounting policy which was issued in2006, the financial restatement system has beenprogressed. Since our study period is later the new financial restatement system, the resultsreflect the changed market. We wish that this study could be beneficial both to thedevelopment of listed companies and the progress of audit career.