Financial Restatements, Audit Fees, and the Moderating Effect of CFO Turnover

We examine post-restatement audit fees and executive turnover for a sample of firms that restated their 2003 financial statements. We investigate and find evidence that audit fees are higher for restatement firms compared with a matched-pair control group of non-restatement firms. We propose that the higher audit fees reflect a cost of both an increase in perceived audit risk and a loss of organizational legitimacy. Prior literature suggests that changing top management is a response to a legitimacy crisis; thus we expect to find that executive turnover moderates the positive relationship between restatement and audit fees. Our results indicate that a change in CFO for a restatement firm moderates the increased audit fee, but a change in CEO does not.