Immaterial Error Corrections and Financial Reporting Reliability

59 Pages Posted: 27 Aug 2016 Last revised: 15 Jun 2021

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 15, 2021

Abstract

We provide large-sample archival evidence on the nature and consequences of errors deemed immaterial to the previously issued financial statements containing the errors (immaterial errors). The incidence of immaterial error corrections has been increasing since about 2004, and these corrections are associated with modestly and discernibly negative share returns that are more negative for income decreasing corrections and corrections that involve multiple issues. 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. Our findings suggest that immaterial errors provide researchers and investors with a more frequent and less severe indicator of potential audit or financial reporting issues as compared to more extreme reporting problems such as material errors corrected by restatements.

Keywords: immaterial, material, misstatement correction, error correction, materiality, revision, out-of-period adjustment, financial reporting quality, audit quality

JEL Classification: M41, M42

Suggested Citation

Choudhary, Preeti and Merkley, Kenneth J. and Schipper, Katherine, Immaterial Error Corrections and Financial Reporting Reliability (June 15, 2021). 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 ( email )

Box 90120
Durham, NC 27708-0120
United States

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