Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

Abstract

We study the frequency of restatements by foreign firms listed on US exchanges. We find that the restatement rate of US listed foreign firms is significantly lower than that of comparable US firms and that the difference depends on the firm's home country characteristics. Foreign firms from countries with a weak rule of law are less likely to restate than are firms from strong rule of law countries. While the lower rate of restatements can represent an absence of errors, it can also indicate a lack of detection and disclosure of errors and irregularities. We infer the effect of detection and disclosure by associating the frequency of restatements with the quality of the firm's internal control system. We find that only US firms and foreign firms from strong rule of law countries show a positive association between restatement frequency and internal control weaknesses. Firms from weak rule of law countries show no significant association. We interpret these findings as home country enforcement affecting firms' likelihood of detecting and reporting existing accounting misstatements. This suggests that for US listed foreign firms, less frequent restatements can be a signal of opportunistic reporting rather than a lack of accounting errors and irregularities.

SOX after Ten Years: A Multidisciplinary Review

“…All restatements include sued and non-sued restatements. Data are from Audit Analytics, Srinivasan, Wahid and Yu (2013) and Cheng, Srinivasan and Yu (2013).…”

Family Control, Accounting Misstatements, and Market Reactions to Restatements: Evidence from China

“…Srinivasan, Wahid, and Yu (2015) argue that a lower rate of voluntary restatements could probably indicate a lower, rather than a higher, reporting quality. Therefore, we exclude all voluntary restatements from this study.…”

“…Neither Agrawal and Chadha (2005) nor Tong (2007) distinguish between voluntary restatements and mandatory (or forced) restatements. As Srinivasan, Wahid, and Yu (2015) point out, a lower rate of voluntary restatements could possibly indicate a lack of detection and disclosure of accounting errors and irregularities and thus a lower earnings quality. The exclusion of voluntary restatements from our study gives us relatively high confidence to conclude that the lower incidence of mandatory restatements among family firms does suggest that family firms have a higher reporting quality than nonfamily firms.…”

Is the SEC Captured? Evidence from Comment-Letter Reviews

“…We follow Srinivasan et al (2014) and define restatements related to severe accounting irregularities using (i) ex post measures using external or board investigation (Hennes et al 2008), and (ii) ex ante measures using the core/non-core account classification (Palmrose et al 2004). Core accounts are those related to revenue recognition, cost of goods sold, operating expenses, or depreciation.…”