Financial Restatements, Auditor Industry Specialization And Auditor Switches

Financial restatements have shaken investors’ confidence in the quality of the financial information they are receiving and on which they are basing their investment decisions. With the increasing frequency of this phenomenon in our country, stakeholders and scholars begin to focus on the issue of financial restatements. Through reviewing existing literatures about financial restatements, we find that the focus of current research is on the holistic relationship between financial restatements and auditor switches. However, in this paper, we try to research the relationship between different types of financial restatements and auditor switches, as well as the influence of auditor industry specialization on the above relationship through theoretical and empirical studies.Firstly, this research analyses the impact of financial restatements and auditor industry specialization on auditor switches through two aspects of auditor dismissal and resignation. Secondly, it selects all A-share listed companies from 2009 to 2013 in Shanghai and Shenzhen stock market as the whole samples, then selects the section of samples that occurred financial restatement as the restatement samples, uses Logistic regression model to examine the relationship between different types of financial restatements and auditor switches, as well as the influence of auditor industry specialization on the above relationship. Moreover, according to the content of restatement announcements, it further subdivides the restatement variables, to explore the influence of the severity, the direction of the change in net profit, and the type of financial restatement reports on auditor switches. Finally, this paper combines the results of theoretical analysis and empirical test, and then puts forward research conclusions and enlightenments.All in all, the results of this paper show that financial restatement companies are more likely to change their auditor, and the more serious of restatements, or the restatements reduce net profit, impact on the information of annual reports, the higher probability of auditor switches. In addition, in the restatement samples, auditor industry specialization is negatively associated with the likelihood of auditor switches. However, when the financial restatements effect net profit, especially the samples which net profit is reduced after restatements, the significant negative correlation between the two variables is inhibited.This study enriches our country’s research findings about the economic consequences of financial restatements, the influence factors of auditor switches, and auditor industry specialization. What’s more, it contributes to deepening external investors’ understanding of the behavior that auditor changes after restatements, and it contributes to promoting accounting firms to develop auditor industry specialization actively.