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Restated Financial Statements and Auditor Litigation

45 Pages Posted: 11 Dec 2000  

Zoe-Vonna Palmrose

University of Southern California

Susan Scholz

University of Kansas - Accounting and Information Systems Area

Date Written: October 2000

Abstract

This study provides evidence on the restatement circumstances associated with lawsuits against auditors. We examine restatements of financial statements previously issued to the public and filed with the SEC by 416 US companies that announced restatements from 1995 to mid-1999. Our examination focuses on the accounting issues giving rise to restatements. We classify these issues as either economic or technical. Economic restatements involve transactions and accounts related to core (recurring) earnings; all other restatements are technical. We find that auditors are significantly more likely to be sued over economic restatements than technical ones. Additionally, we find that revenue restatements, one type of economic restatement and overall the most frequent, primarily contribute to this result. While economic restatements are associated with more severe circumstances as measured by fraud, materiality, bankruptcy/delisting, and security price reaction, our multivariate model includes these as control variables.

Keywords: Restatements, Auditor Litigation, Securities Class Actions, Audit and Reporting Quality

JEL Classification: M41, M49, K22, G33

Suggested Citation

Palmrose, Zoe-Vonna and Scholz, Susan, Restated Financial Statements and Auditor Litigation (October 2000). Available at SSRN: https://ssrn.com/abstract=248455 or http://dx.doi.org/10.2139/ssrn.248455

Zoe-Vonna Palmrose

University of Southern California ( email )

Marshall School of Business, 0441
Los Angeles, CA 90089-0441
United States
213-740-5019 (Phone)
213-747-2815 (Fax)

Susan Scholz (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Ave
Lawrence, KS 66045
United States
785-864-7554 (Phone)
785-864-5328 (Fax)

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