Download this Paper Open PDF in Browser

Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

51 Pages Posted: 25 May 2012 Last revised: 18 Jul 2014

Suraj Srinivasan

Harvard Business School

Aida Sijamic Wahid

University of Toronto - Accounting; University of Toronto - Rotman School of Management

Gwen Yu

Harvard Business School

Multiple version iconThere are 2 versions of this paper

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

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

Suraj Srinivasan

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=10700

Aida Sijamic Wahid

University of Toronto - Accounting ( email )

105 St George St
Toronto, ON M5S 3E6
Canada

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Gwen Yu (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 383
Boston, MA 02163
United States

Paper statistics

Downloads
360
Rank
34,188
Abstract Views
1,795