Maintaining Public Trust: Nonprofessional Inbestors’ Trust Judgement Associated with Financial Reporting Restatements and Audit Tenure

Abstract

For over a decade, the accounting profession and regulators have recognized the importance of maintaining public trust in US financial markets.  This study uses a bad news context to examine the source of financial reporting restatements and audit tenure on public trust.  We predict and find a positive association between auditor-initiated restatements and the public's trust in both the management of the firm and the auditor.  Surprisingly, it was observed that the public does not penalize management for implementing an independent auditor-proposed restatement despite the negative market reactions associated with financial restatements.  The results indicate that efforts to promote transparency and reliability in financial reporting are important.  The public's trust in the management of corporations and their auditors remains intact, regardless of how the restatements are initiated.