Do Type II Subsequent Events Impair Financial Reporting Quality?

The Accounting Review, Forthcoming

Posted: 12 Nov 2019

See all articles by Keith Czerney

Keith Czerney

University of Missouri-Columbia

Jaime J. Schmidt

University of Texas at Austin

Anne Thompson

University of Illinois at Urbana-Champaign

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: October 23, 2019

Abstract

This study examines whether material corporate events that occur during the year-end closing process constrain management’s and the auditor’s resources and inhibit them from providing high quality financial reports. For a sample of U.S. company financial reports issued during 2000–2013, we identify material corporate events using Type II subsequent event footnote disclosures (i.e., material events that occur in year t+1, but prior to the issuance of the year t financial statements, yet do not affect amounts recognized in year t). We find that Type II subsequent events are associated with lower financial reporting quality as measured by the need to subsequently restate the year t financial statements. The increased restatement likelihood only occurs when managers are resource constrained. Auditors can mitigate the increased restatement risk but only when they allocate more resources to the engagement. Our results underscore the importance of resource management in the financial reporting and audit processes.

Suggested Citation

Czerney, Keith and Schmidt, Jaime J. and Thompson, Anne and Zhu, Wei, Do Type II Subsequent Events Impair Financial Reporting Quality? (October 23, 2019). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3478857

Keith Czerney

University of Missouri-Columbia ( email )

College of Business
Columbia, MO 65211
United States

Jaime J. Schmidt (Contact Author)

University of Texas at Austin ( email )

Austin, TX 78712
United States

Anne Thompson

University of Illinois at Urbana-Champaign ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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