Do Auditors Price the Risk Related to a Restated Statement of Cash Flows?

Motivated by the ongoing regulatory debate on the need to improve the auditing of cash flow disclosures, this study examines auditors’ responses to cash flow restatements (CFRs) and whether such restatements are associated with subsequent indicators of audit risk. Using a sample of 67,143 U.S. listed firm-year observations from 2006 to 2021, we find that CFRs, unlike other types of restatements, are not associated with higher audit fees in the year of restatement. Nevertheless, firms issuing CFRs experience a significantly higher likelihood of adverse outcomes in the subsequent three years, including going concern opinions, reported internal control weaknesses, and subsequent non-cash flow restatements (NCFRs). Our findings therefore highlight a potential disconnect between auditors’ pricing responses to CFRs and the longer-term risk implications of CFRs and encourage both professional associations and regulators to develop new standards and guidelines on how to audit the statement of cash flows. Moreover, this study expands on the previous research on audit fees, financial restatements and audit risk.