The Research On The Relationship Between The Financial Restatement And CPA Firm Change

Ordered security market requires high-quality information disclosure. Moreover, financial report is regarded as an important carrier of listed companies disclose information and thus it is the main way for investors and other stakeholders to have access to receive production and business information. Financial restatement is a process of modify false, misleading or omitted information of previously announced financial reports. This behavior occurred increasing frequently since the1990s. Especially in recent years, more than15%of China’s listed companies have financial restatement behavior, most of whom adjust significant accounting annual index. However, according to signal theory, financial restatements will pass bearish signal to stock market. Meanwhile, managers of listed companies have authorities to hire accountants. Hence, when the law is lack of regulation and the audit industry is in excessive competition, listed company is likely to use its right to change accounting firm to obtain a standard audit opinion. At the same time, the accounting firm would take reputation and risk management into consideration when companies have financial restatement. Therefore, accounting firm will increase audit fees of listed companies or issue non-standard audit opinion. If a listed company cannot reach an agreement on audit fee or audit opinion, accounting firms would not have contracts with customers whose risk and reward are not within the acceptable range. Therefore, whether in the next fiscal year, listed company which have financial restatements will change accounting firm or not is a question worth exploring. Moreover, through literature review of the financial restatement and accounting firms change, it is found that the existing research literature are concentrated on market response and litigation when refers to the economic consequences arising from financial restatements, so this article will explore whether financial restatements will make listed companies easier to change accounting firms. In addition, they generally have not studied after financial restatements, whether financial restatement time affect change of accounting firm and the size of the firms before and after the change. As a result, this paper would open up a new perspective for existing auditing theoretical research and provide some help for supervision departments to supervise financial restatements and prevent malicious change behavior.Firstly, this paper conducts the theoretical analysis on the relationship between financial restatements and CPA firm change through asymmetric information theory and firm risk management theory. Secondly, the sample is China’s A-share listed companies from year2004to year2012. And it uses descriptive statistics and multivariate regression model to analyze the full sample to verify whether a company would change accounting firm after financial restatement. The empirical results show that the listed companies which have financial restatements are more likely to change accounting firm. Because the firm will assess the risks and rewards of financial restatements and may use resignation strategy based on assessment. Meanwhile, the listed company will consider change the accounting firm due to the pursuit of standard unqualified audit opinion and low audit fees. What is more, by selecting the sample of listed companies which have financial restatements, the paper verify after the financial restatement, relationship between financial restatement time and accounting firm change is positive. The study finds if corporate have more times of financial restatements, then it would be more likely to change CPA firm. Empirical results suggest that firms will assess the risk of financial restatements and the risk will be greater if financial restatements have more times. So the CPA would be more likely to take risk management strategies of resignation. Finally, by selecting the sample in which the listed companies all change CPA firm to study the size change of the accounting firm before and after the financial restatement. Empirical results show that after the occurrence of financial restatements, listed companies are more likely to employ a smaller scale accounting firms. Firstly, the large accounting firms audit will take into account the higher risk and it would require higher audit fees. Therefore, if the listed company does not want to pay high audit fees, they will choose the smaller accounting firms. Secondly, the large accounting firms will pay more attention to maintain a good reputation as well as its long-term development. Therefore, accounting firms may not accept the listed companies who have financial restatements due to the reputation. Thirdly, listed companies need standard audit opinions to weaken bad market signals financial restatement brings. So it will employ smaller accounting firms to purchase audit opinions. In order to test the robustness of each model, the paper conducts empirical analysis through annual inspection and replacement of key variables and results are consistent. At the end of the article, it shows the limitations and shortcomings of the paper and points out the direction for further study. Finally, a few suggestions have been put forward about the current lack of regulation on financial restatements and CPA change behavior. For example, strengthen the company’s financial restatement verification, improve CPA firm change disclosure and enhance regulation of audit fees after financial restatements.