Investors' Response to Revelations of Prior Uncorrected Misstatements

48 Pages Posted: 21 May 2011 Last revised: 24 Jun 2012

See all articles by Thomas C. Omer

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Marjorie K. Shelley

University of Nebraska at Lincoln - School of Accountancy

Anne Thompson

University of Illinois at Urbana-Champaign

Date Written: January 30, 2012

Abstract

This study examines investors’ response to the disclosure of prior period, auditor-waived misstatements under Staff Accounting Bulletin No. 108, Considering the effects of prior year misstatements when quantifying misstatements in the current year. Auditors’ misstatement correction decisions typically are not observable, and financial statement users have little insight into auditors’ and managers’ disposition of identified misstatements, a dimension of audit and financial statement quality. We find that investors respond negatively to the disclosure of SAB No. 108 misstatements and this response is associated with the current-period auditor initially waiving the misstatement, client importance, and misstatement characteristics. Although SAB No. 108 misstatements were waived under prevailing materiality guidance, our findings suggest that investors interpret SAB No. 108 misstatements as indicating lower perceived audit quality.

Keywords: Auditor Independence, Materiality, Staff Accounting Bulletin No. 108, Client Importance, Auditor Tenure, Misstatements

JEL Classification: M41, M42, M48

Suggested Citation

Omer, Thomas C. and Shelley, Marjorie and Thompson, Anne, Investors' Response to Revelations of Prior Uncorrected Misstatements (January 30, 2012). Available at SSRN: https://ssrn.com/abstract=1846576 or http://dx.doi.org/10.2139/ssrn.1846576

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Marjorie Shelley

University of Nebraska at Lincoln - School of Accountancy ( email )

445E Howard L. Hawkes Hall
Lincoln, NE 68588-0488
United States

Anne Thompson (Contact Author)

University of Illinois at Urbana-Champaign ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States

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