Immaterial Error Corrections and Financial Reporting Reliability

62 Pages Posted: 27 Aug 2016 Last revised: 22 Oct 2020

See all articles by Preeti Choudhary

Preeti Choudhary

University of Arizona, Eller College of Management

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting

Katherine Schipper

Duke University - Fuqua School of Business

Date Written: October 21, 2020

Abstract

We provide large-sample archival evidence on the nature and consequences of immaterial error corrections. The incidence of these error corrections has been steadily increasing since about 2004, and they are associated with modestly but discernibly negative share price returns that are more negative for more-severe errors. Despite their designation as immaterial, we find that immaterial errors are a leading indicator of poor reporting reliability as measured by future material and immaterial reporting errors, material weaknesses in internal controls and SEC comment letters. We believe our findings make two contributions. First, future research on audit quality and reporting quality might incorporate immaterial errors as quality-indicators. Second, our analyses inform debates about managers’ materiality assessments by providing evidence on the predictive ability of immaterial error corrections for future reporting outcomes.

Keywords: materiality, material error, immaterial error, error correction, revision, out-of-period adjustment

JEL Classification: M41, M42

Suggested Citation

Choudhary, Preeti and Merkley, Kenneth J. and Schipper, Katherine, Immaterial Error Corrections and Financial Reporting Reliability (October 21, 2020). Available at SSRN: https://ssrn.com/abstract=2830676 or http://dx.doi.org/10.2139/ssrn.2830676

Preeti Choudhary (Contact Author)

University of Arizona, Eller College of Management ( email )

School of Accountancy
Tucson, AZ 85721
United States

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Katherine Schipper

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

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