Restating Internal Control Reports following Financial Statement Restatements: Determinants and Consequences

56 Pages Posted: 14 Nov 2015 Last revised: 26 Jul 2021

See all articles by Mei Feng

Mei Feng

University of Pittsburgh - Katz Graduate School of Business

Chan Li

University of Kansas

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

Lili Sun

University of North Texas - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2021

Abstract

After restating their financial statements, companies may voluntarily restate their previously issued internal control (IC) reports for the financial statement (FS) misstatement periods changing them from “effective” to “ineffective.” When announcing these IC restatements, companies often provide a detailed explanation of the IC problems and a discussion of their plans to remediate these problems. We find that companies with less severe IC problems which can be remediated more quickly are more likely to restate their IC reports. Moreover, these results are driven by companies with a higher need for external financing, suggesting that IC restaters voluntarily restate their IC reports in order to inform investors about their less severe IC material weaknesses and their plans to improve IC quality. Finally, we find that, relative to other FS restatement companies, IC restaters have a lower likelihood of Chief Financial Officer turnover and auditor resignation following the FS restatement.

Keywords: restatements, internal control, CFO turnover, auditor resignation

JEL Classification: M41

Suggested Citation

Feng, Mei and Li, Chan and Raghunandan, Kannan and Sun, Lili, Restating Internal Control Reports following Financial Statement Restatements: Determinants and Consequences (July 20, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2690035 or http://dx.doi.org/10.2139/ssrn.2690035

Mei Feng

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Chan Li (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Kannan Raghunandan

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

Lili Sun

University of North Texas - Department of Accounting ( email )

1155 Union Circle #305219
Denton, TX 76203-5017
United States
940-565-3077 (Phone)

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