Financial Restatement, Earnings Quality And Abnormal Audit Fees

High quality of accounting information has always been the focus of the one of the securities market. The reliable and timely accounting information has always been regarded as the necessary to ensure an effective capital markets. As a major means for investors to obtain company information, the high quality of financial statement is very important. But recently, a number of financial restatements appear frequently, which increases the information risk and uncertainty in investors’ decision-making process. And also, it has raised wide concerns from the theoretical circles and the practical sides. This paper try to answer two questions:one is what the situation of earnings quality of company before they restate financial report. The other one is that the relationship between audit fees and financial restatements.This paper selects the firms those report financial restatement announcement of Annual Report in 2011-2012, and makes comparing study on firms without financial restatement with the same size in the same industry. Firstly, this paper analyzes the quality characteristics of firms with financial restatement. Empirical data show that the earnings persistence of firms with financial restatements is lower than the comparing group, with more serious earnings management presenting as the manipulated accruals returns. Secondly, this paper tests the relationship between audit fees and subsequent financial restatements. The result is that abnormal audit fees have no significant relation with subsequent financial restatements. This show us that audit fees do not forecast future financial restatements, so we should improve the quality of our auditing work. Thirdly, by dividing the financial restatements by earning quality, the result tells us that abnormal audit fees have significant relation with financial restatements in lower earning quality group. It shows us that we should focus abnormal higher audit fees, because the higher abnormal audit fees influence the auditing independence.Our paper shows the situation of the earning quality and audit fees before financial restatement. At last, this paper offer suggestions to strengthen the construction of financial restatement regulation.