On the “Fresh Look” Argument: The Involvement of Current Auditors in the Restatements of Financial Statements Audited by Predecessors

This paper examines the “fresh look” argument by the involvement of current auditors in the restatements of financial statements audited by predecessors. This identification of a fresh look is independent of auditor tenure which is a noisy proxy for the former because short tenure also reflects auditors' insufficient client-specific knowledge. Using restatements of financial statements disclosed in Form 8-K Item 4.02 and developing a model to explain the involvement of current auditors in restatements, this paper reports that the likelihood of involvement of current auditors in restatements is higher when the financial statements were audited by predecessors, suggesting that a fresh look provides higher audit quality. It also shows that the likelihood of such involvement is not moderated by short auditor tenure. These results would be relevant to parties interested in the “fresh look” argument.