Financial Statement Dissimilarity and SEC Scrutiny

53 Pages Posted: 30 May 2019 Last revised: 2 Mar 2021

See all articles by Stephen V. Brown

Stephen V. Brown

University of Connecticut - Department of Accounting

Guang Ma

McGill University - Desautels Faculty of Management

Jenny Wu Tucker

University of Florida - Warrington College of Business Administration

Date Written: March 1, 2021

Abstract

Firms with similar businesses are expected to display similar relations between their financial statement items. We examine whether a firm is more likely to draw SEC scrutiny when its financial statement relations deviate from its industry peers or from its past. We propose measures for the similarity (or dissimilarity) of a firm’s financial statement relations to its peers in the same industry-year or its own previous year and further decompose peer-to-peer similarity into the predicted component, which is justifiable by a firm’s business model, economic performance, and accounting policies, and the residual component. We find that firms with greater peer-to-peer dissimilarity and year-over-year dissimilarity are more likely to receive SEC comment letters, especially on financial statement issues. The findings about peer-to-peer similarity are largely driven by its residual and therefore unjustifiable component. Further, we separate the sample period before the SEC launched a data analytics peer-comparison model (referred to as “RoboCop” in the media) from the period after the launch. Our findings about peer-to-peer similarity are driven by the post-RoboCop period, whereas we observe no difference in the role of year-over-year similarity before vs. after RoboCop.

Keywords: financial statement similarity; SEC scrutiny; comment letter; comparability.

JEL Classification: [M41, G38]

Suggested Citation

Brown, Stephen V. and Ma, Guang and Tucker, Jenny Wu, Financial Statement Dissimilarity and SEC Scrutiny (March 1, 2021). Available at SSRN: https://ssrn.com/abstract=3384394 or http://dx.doi.org/10.2139/ssrn.3384394

Stephen V. Brown

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

HOME PAGE: http://www.stephenvbrown.com/

Guang Ma

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5
514-398-5075 (Phone)

HOME PAGE: http://guangma.info

Jenny Wu Tucker (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States
352-273-0214 (Phone)
352-392-7962 (Fax)

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