Accounting Changes and Misstatement Risk

65 Pages Posted: 29 Jan 2021 Last revised: 17 Mar 2022

See all articles by Kyle Peterson

Kyle Peterson

University of Oregon - Charles H. Lundquist School of Business

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management

T. Jeffrey Wilks

Brigham Young University

Date Written: March 15, 2022

Abstract

We examine how various types of accounting changes affect financial misstatement risk and the ways auditors mitigate that risk. We find greater misstatement risk for both idiosyncratic and industry-wide accounting changes and that auditors play an important role in mitigating some of these risks in some situations but not others. Higher quality auditors appear to mitigate the misstatement risk from industry-wide changes, but not idiosyncratic ones. Misstatement risk is also mitigated when auditors communicate accounting changes through explanatory paragraphs and preferability letters and when they identify material weaknesses. We also find evidence that revenue- and non-revenue-related accounting changes are associated with revenue-related and non-revenue-related misstatements, respectively. Our evidence suggests that accounting changes are associated with a heightened risk of misstating the financial statements and auditors do not fully mitigate these risks in their audits.

Keywords: accounting changes, accounting consistency, misstatements, auditors

JEL Classification: M41

Suggested Citation

Peterson, Kyle and Schmardebeck, Roy and Wilks, Thomas Jeffrey, Accounting Changes and Misstatement Risk (March 15, 2022). Available at SSRN: https://ssrn.com/abstract=3745418 or http://dx.doi.org/10.2139/ssrn.3745418

Kyle Peterson

University of Oregon - Charles H. Lundquist School of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

Roy Schmardebeck (Contact Author)

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

Thomas Jeffrey Wilks

Brigham Young University ( email )

School of Accountancy
526 Tanner Building
Provo, UT 84602 84602
United States
801-422-3930 (Phone)
801-422-0621 (Fax)

HOME PAGE: http://marriottschool.byu.edu/directory/details?id=5337

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