Accounting Restatements and the Timeliness of Disclosures

Abstract

SYNOPSIS Regulators are concerned that during the process of restating financial statements, firms fail to provide timely progress updates, and delay earnings announcements and regulatory filings. To reduce these perceived lags in disclosure, an advisory group to the Securities and Exchange Commission recommends more use of catch-up adjustments rather than restatements to correct accounting errors. Some investor groups oppose the recommendations because they fear that preparers will begin to correct important errors through catch-up adjustments, which are less transparent than restatements. We inform this debate by examining (1) the length of disclosure lags around restatements to understand the extent of the problem, and (2) the causes of disclosure lags to evaluate whether the reforms would address the root causes of the lags. We find that lengthy lags are uncommon and appear to be largely unavoidable consequences of fraud investigations. When fraud is a factor, the firm typically takes weeks or months to release restatement details, quarterly earnings, and SEC filings, likely because investigations are necessary to restore the firm's ability to produce reliable information. When fraud is not a factor, the firm typically discloses the restatement's earnings impact within a day of the initial restatement announcement, and delays the quarterly earnings announcement and SEC filing by less than a week. Although fraud is by far the most economically significant cause of lags, we also find that lags increase when a restatement involves multiple, long-standing, or large errors. Finally, we show that the restatements targeted by the reforms tend to have the shortest lags, even among non-fraudulent restatements. Thus, the proposed reforms would have a negligible effect on disclosure timeliness because the targeted restatements tend to have short lags to begin with, and because long lags appear to be caused by inherent constraints on producing reliable information. JEL Classifications: M41, G38. Data Availability: Data are available from sources identified in the paper.

Bringing Darkness to Light: The Influence of Auditor Quality and Audit Committee Expertise on the Timeliness of Financial Statement Restatement Disclosures

“…However, BB do not document a significant relationship between disclosure lags and auditor quality and do not investigate the potential effects of corporate governance. Badertscher and Burks (2011) ultimately conclude that additional regulation mandating the timely disclosure of restatement data would not be likely to reduce disclosure lags because the majority of firms with significant delays seem unable to provide disclosure information on a timely basis. We extend BB by focusing exclusively on dark restatements and limiting our analysis to restatements that were announced after the introduction of the four-day rule.…”

“…In a study that is related to ours, Badertscher and Burks (2011;hereafter BB) investigate the causes and consequences of a number of different types of disclosure lags for restating firms having data available between 1997 and 2005. They find that in their broad sample of restatements, long disclosure lags are uncommon and are largely due to board, regulatory, or fraud investigations.…”

“…Badertscher and Burks (2011, 609) conclude that dark restatements result primarily from a need for investigation into cases of fraud or multiple, longstanding, or large errors and state that ''long lags appear to be caused by inherent constraints on producing reliable information.' ' Badertscher and Burks (2011) do not document a significant relationship between disclosure lags and auditor quality nor do they investigate how governance might influence the timely provision of restatement details. By restricting our analysis to (1) companies with initial restatement disclosures that do not provide specific quantitative details, and (2) disclosures occurring after the effective date of the four-day rule, we hope to shed light on the relationships that may exist between auditors, audit committees, and disclosure timeliness for the subset of restating firms with ''inherent constraints.…”

“…Our paper is largely an extension of Badertscher and Burks (2011) who investigate disclosure lags for a broad sample of restatements (a majority of which are not ''dark'') announced between 1997 and 2005. Badertscher and Burks (2011, 609) conclude that dark restatements result primarily from a need for investigation into cases of fraud or multiple, longstanding, or large errors and state that ''long lags appear to be caused by inherent constraints on producing reliable information.'…”

Quality of financial information and liquidity

“…Some investor groups may also oppose the recommendations because they may feel that preparers could begin to correct important errors through catch-up adjustments, which would become less transparent than restatements. Badertscher and Burks (2011) examined the length of disclosure lags around restatements to understand the extent of the problem, and the causes of disclosure lags to evaluate whether the reforms would address the root causes of the lags. They reported that lengthy lags were uncommon.…”