Determinants of Financial Misreporting: A Survey of the Financial Restatement Literature

84 Pages Posted: 25 Aug 2018 Last revised: 7 Dec 2019

Date Written: November 28, 2019

Abstract

We provide a comprehensive overview of the findings regarding the causes of financial restatements in the US. Acknowledging that restatements may derive from intentional and unintentional misreporting, we assign the findings to one of three pillars: i) expected benefits, ii) expected costs and iii) executive characteristics. Assuming that managers are rational decision-makers, the likelihood of misreporting increases in expected benefits and decreases in expected costs. While expected benefits reflect executives’ desire to maximize private benefits through compensation contracts, expected costs refer to the likelihood that misreporting will be revealed through internal or external controls. Given that efficiency of internal and external controls derives from the ability to avoid both, intentional and unintentional misreporting, we also review literature that investigates less severe restatements. We support the existing research by enhancing the understanding of restatements in light of severe and less severe restatements, identifying research gaps and organizing fragmented findings into a larger picture. Ultimately, our survey might inform regulatory bodies, auditors, standard setters and executives regarding restatements of financial restatements.

Keywords: survey, financial restatement, audit quality, financial reporting quality

JEL Classification: G1, K4, M4

Suggested Citation

Sievers, Soenke and Sofilkanitsch, Christian, Determinants of Financial Misreporting: A Survey of the Financial Restatement Literature (November 28, 2019). Available at SSRN: https://ssrn.com/abstract=3231740 or http://dx.doi.org/10.2139/ssrn.3231740

Soenke Sievers

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

HOME PAGE: http://www.upb.de/accounting

Christian Sofilkanitsch (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

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