The Effects of Restatements for Misreporting on Auditor Scrutiny of Peer Firms

Prior research contends that financial misreporting has a spillover effect on the outcomes of peer firms within the same industry through investment decisions, information risk, and shareholder wealth. We predict and confirm a higher level of audit fees for peer firms when serious misreporting by other firms is announced in the industry. We find this effect is limited to peers that exhibit poor internal control quality. In addition, we observe higher audit fees for peers of industry prominent misreporting firms and for peers of firms announcing restatements with larger negative market reactions. Overall, our results suggest that financial misreporting in the industry has a spillover effect on audit fees of non-misreporting peer firms