Imperfect Accounting and Reporting Bias

Posted: 14 Nov 2017

See all articles by Vivian W. Fang

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting

Allen Huang

Hong Kong University of Science and Technology - Department of Accounting

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2017

Abstract

Errors and bias are both inherent features of accounting. In theory, while errors discourage bias by lowering the value relevance of accounting, they can also facilitate bias by providing camouflage. Consistent with theory, we find a hump-shaped relation between a firm's propensity to engage in intentional misstatement and the prevalence of unintentional misstatements in the firm's industry for the whole economy and a majority of the industries. The result is robust to using firms' number of items in financial statements and exposure to complex accounting rules as alternative proxies for errors and to using the restatement amount in net income to quantify the magnitude of bias and errors. To directly test for the two effects of errors, we show that when errors are more prevalent, the market reacts less to firms' earnings surprises and bias is more difficult to detect. Our results highlight the imperfectness of accounting, advance understanding of firms' reporting incentives, and shed light on accounting standard setting.

Keywords: accounting errors; reporting bias; fraud; accounting regulation; earnings response coefficient; fraud detection; textual analysis

JEL Classification: G32; G34; G38; M40; M41; M48; M53

Suggested Citation

Fang, Vivian W. and Huang, Allen and Wang, Wenyu, Imperfect Accounting and Reporting Bias (September 1, 2017). Journal of Accounting Research, Vol. 55, No. 4, 2017; Kelley School of Business Research Paper No. 17-77. Available at SSRN: https://ssrn.com/abstract=3068872

Vivian W. Fang (Contact Author)

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Room 3-109
Minneapolis, MN 55455
United States

HOME PAGE: http://www.vivianfang.org

Allen Huang

Hong Kong University of Science and Technology - Department of Accounting ( email )

LSK Business School Building
HKUST
Clear Water Bay, Kowloon
Hong Kong
+852-23587559 (Phone)

HOME PAGE: http://www.AllenHuang.org

Wenyu Wang

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

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

Register to save articles to
your library

Register

Paper statistics

Abstract Views
837
PlumX Metrics