51 Pages Posted: 25 May 2012 Last revised: 18 Jul 2014
Date Written: July 6, 2014
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.
Suggested Citation: Suggested Citation
Srinivasan, Suraj and Wahid, Aida Sijamic and Yu, Gwen, Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting (July 6, 2014). Available at SSRN: https://ssrn.com/abstract=2065892 or http://dx.doi.org/10.2139/ssrn.2065892
By Ivy Zhang