PCAOB Data Shows that a Restatement is Likely to Follow an Auditor Change

The Public Company Accounting Oversight Board’s Office of Economic and Risk Analysis (OERA) has published Data Points: Financial Restatements and Auditor Turnover.  The report finds that, from 2005 to 2024, 29 percent of Big R restatements followed an auditor change in the previous year. For the entire public company population, the Big R restatement rate was around three percent. Therefore, a company that changes auditors is about ten times more likely to restate in the following year than the average company.  OERA’s analysis excludes investment companies, employee benefits plan, and restatements related to the SEC’s 2021 Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies.

A Big R restatement occurs when a company determines that a previously issued financial statement contained a material error and therefore cannot be relied upon. Big R restatements must be disclosed in an SEC Form 8-K filing.  OERA’s report finds that the number of Big R restatements has declined substantially during the past twenty years but ticked upward recently.  (Other studies have reached the same conclusion, see Two Studies Find that Restatements Rates Remain Low, Although Big R Restatements Have Begun to Increase, July 2024 Update.)  For example, in 2005, there were 911 restatements, 155 of which (17 percent) followed an auditor change.  2020 was the low point for restatements.  In that year, there were only 79 Big R restatements, 20 of which (25 percent) came after an auditor change. In 2024, there were 180 Big R restatements, 54 of which (30 percent) occurred in the year following a change in auditor.

The new Data Points report also provides information on the frequency of auditor changes from 2005 to 2024.  During these 20 years, the auditor-change rate averaged 11 percent.  The year with the lowest rate of auditor change was 2020, when 7.8 percent of companies changed auditors.  The years with the highest rate of auditor change – 13.1 percent -- were 2005 and 2009.  Since bottoming in 2020, change rates have increased each year, and were a near-record 12.8 percent in 2024.

The fact that restatements are more likely in the first year of a new auditor’s tenure is not surprising. A new audit firm takes a fresh look at the company’s financial reporting and brings no assumptions or biases from prior audits.  Similarly, the new auditor has no incentive to overlook or perpetuate past mistakes or debatable judgment calls.  A new auditor may also perform more rigorous procedures as part of building its knowledge of the client.  While restatements can have negative consequences for the company, from an audit committee perspective the fresh look that a new auditor provides may improve long‑term reporting integrity.