Maintaining Public Trust: Nonprofessional Investors’ Trust Judgments Associated with Financial Reporting Restatements and Audit Tenure

Public trust is a necessary pre-condition for investor participation in financial markets. For more than a decade both 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 effects of financial reporting restatements and audit tenure on public trust. We find higher levels of public trust result when financial restatements are initiated by the independent auditor as opposed to when regulators initiate a restatement. Practical implications and policy ramifications are discussed.