Immaterial Error Corrections and Financial Reporting Reliability

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