Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting
51 Pages Posted: 25 May 2012 Last revised: 18 Jul 2014
There are 2 versions of this paper
Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting
Date Written: July 6, 2014
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.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Economic Consequences of the Sarbanes-Oxley Act of 2002
By Ivy Zhang
-
The Sarbanes-Oxley Act and the Making of Quack Corporate Governance
-
Corporate Governance and Firm Value: the Impact of the 2002 Governance Rules
-
Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management
By Haidan Li, Morton Pincus, ...
-
Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
By Christian Leuz, Alexander J. Triantis, ...
-
The Sarbanes-Oxley Act and Firms' Going-Private Decisions
By Ellen Engel, Rachel M. Hayes, ...
-
The Sarbanes-Oxley Act of 2002 and Security Market Behavior: Early Evidence
By Zabihollah Rezaee and Pankaj K. Jain