Firm Accrual Quality Surrounding Restatements

Abstract

We examine direct measures of accrual quality for a sample of restatement firms and find that accrual quality improves significantly, on average, from the period of misstatement to the post-restatement period. Using the Institute of Internal Auditors corporate governance model to frame our multivariate analysis, we find that both post-restatement levels and changes of accrual quality are significantly higher for firms with management change and significantly lower for firms switching to a lower quality auditor. Overall, our findings underscore the importance of governance mechanisms in determining accrual quality in the years following a restatement.

Keywords: restatements, accrual quality, management turnover, auditor quality, corporate governance

JEL Classification: M41, M43, G3