University of Arkansas, Fayetteville
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Abstract

This paper investigates the economic determinants of restatements, focusing on companies that were the object of an SEC Enforcement Action. A sample of 30 restatement firms is matched with 30 non-restatement firms in the same industry and same business and with a similar size as measured by assets. It was found that the use of a Big 5 audit firm reduces the incidence of restatement. More specifically, use of Ernst & Young as a Big 5 audit firm significantly reduces the possibility of restatement. Variables testing debt to equity ratio, proportion of management ownership and proportion of blockholder ownership as determinants of restatement were not significant with this particular sample. Because of the strong increase in the number of restatements in recent years, it is important for a company to reduce the potential probability of restatement of its financial statements. This can be done through the utilization of a Big 5 audit firm.

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