The importance of distinguishing errors from irregularities in restatement research

The case of restatements and CEO/CFO turnover

Karen M. Hennes, Andrew Leone, Brian P. Miller

Research output: Contribution to journalArticle

316 Citations (Scopus)

Abstract

Research on restatements has grown significantly in recent years. Many of these studies test hypotheses about the causes and consequences of intentional managerial misreporting but rely on restatement data (such as the GAO database) that contains both irregularities (intentional misstatements) and errors (unintentional misstatements). We argue that researchers can significantly enhance the power of tests related to restatements by distinguishing between errors and irregularities, particularly in recent periods when the relative frequency of error-related restatements is increasing. Based on prior research, the reading of numerous restatement announcements, and the guidance that boards receive from lawyers, auditors, and the SEC on how to respond to suspicions of deliberate misreporting, we propose a straightforward procedure for classifying restatements as either errors or irregularities. We show that most of the restatements we classify as irregularities are followed by fraud-related class action lawsuits as compared to only one lawsuit in the group of restatements classified as errors. As further validation of our proxy, we report that the market reaction to the restatement announcement for our irregularities sample (-14 percent) is also significantly more negative than it is for our errors sample (-2 percent). Finally, we demonstrate the importance of distinguishing errors from irregularities by showing the impact it has on inferences about the relation between restatements and CEO/CFO turnover over time.

Original languageEnglish (US)
Pages (from-to)1487-1519
Number of pages33
JournalAccounting Review
Volume83
Issue number6
DOIs
StatePublished - Nov 2008

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Restatements
Turnover
Chief executive officer
Misreporting
Lawsuit
Announcement
Hypothesis test
Lawyers
Guidance
Suspicion
Inference
Auditors
Market reaction
Data base
Fraud

Keywords

  • GAO database
  • Irregularities
  • Management turnover
  • Restatements

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

The importance of distinguishing errors from irregularities in restatement research : The case of restatements and CEO/CFO turnover. / Hennes, Karen M.; Leone, Andrew; Miller, Brian P.

In: Accounting Review, Vol. 83, No. 6, 11.2008, p. 1487-1519.

Research output: Contribution to journalArticle

Hennes, Karen M. ; Leone, Andrew ; Miller, Brian P. / The importance of distinguishing errors from irregularities in restatement research : The case of restatements and CEO/CFO turnover. In: Accounting Review. 2008 ; Vol. 83, No. 6. pp. 1487-1519.
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