MD&A Disclosure of Critical Accounting Policies and Financial Reporting Risk: Evidence from Restatements

Journal of Accounting, Auditing & Finance, Forthcoming

46 Pages Posted: 10 Dec 2020

See all articles by Brandon Szerwo

Brandon Szerwo

State University of New York (SUNY) - Accounting & Law

Date Written: July 23, 2020

Abstract

In this study, I examine whether management discloses areas with higher financial reporting risk as critical accounting policies (CAPs) and how investors react to restatements of areas previously disclosed as CAPs. Through CAPs, management annually discloses the accounting policies that it views as most crucial to the portrayal of the firm's financial condition and results and require its most difficult, subjective, and/or complex judgments. I find that CAPs covering four areas are predictive of subsequent restatements: revenue, derivatives, accruals and short-term liabilities, and capitalization of expenditures. In tests of investor reactions to restatements, I find that cumulative abnormal returns to restatements are more severe (negative) when the areas restated were previously disclosed as CAPs. Collectively, these findings support that management discloses area-specific financial reporting risk through CAPs in some, but not all, areas and that investors view restatements of CAP areas as more egregious than restatements of non-CAP areas.

Keywords: Critical accounting policies and estimates (CAPs), financial reporting risk, restatements, SEC, market response to restatements

JEL Classification: M40, M41

Suggested Citation

Szerwo, Brandon, MD&A Disclosure of Critical Accounting Policies and Financial Reporting Risk: Evidence from Restatements (July 23, 2020). Journal of Accounting, Auditing & Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3719252 or http://dx.doi.org/10.2139/ssrn.3719252

Brandon Szerwo (Contact Author)

State University of New York (SUNY) - Accounting & Law ( email )

Buffalo, NY 14260
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
35
Abstract Views
216
PlumX Metrics