Restating Internal Control Reports following Financial Statement Restatements: Determinants and Consequences

Posted: 2 Sep 2021

See all articles by Mei Feng

Mei Feng

University of Pittsburgh - Katz Graduate School of Business

Chan Li

University of Kansas

Kannan Raghunandan

Florida International University (FIU)

Lili Sun

University of North Texas - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: August 16, 2021

Abstract

After restating their financial statements, companies may voluntarily restate their previously issued internal control (IC) reports for the financial statement (FS) misstatement periods, changing them from “effective” to “ineffective.” This paper examines the determinants and consequences of IC restatements, which have been of concern to financial statement users. When announcing these IC restatements, companies often provide a detailed explanation of the IC problems and a discussion of their plans to remediate these problems. We find that companies with less severe IC problems which can be remediated more quickly are more likely to restate their IC reports. Moreover, these results are driven by companies with a higher need for external financing, suggesting that IC restaters voluntarily restate their IC reports in order to inform investors about their less severe IC material weaknesses and their plans to improve IC quality. Finally, we find that, relative to other FS restatement companies, IC restaters have a lower likelihood of CFO turnover and auditor resignation following the FS restatement. Taken together, our results suggest that voluntary IC restatements are used by IC restaters as a means to separate themselves from other FS restatement companies with more severe control problems and slower remediation plans. Our findings also indicate that studies investigating IC quality and related disclosures need to distinguish between IC restaters and other FS restatement companies because of the different characteristics and consequences between the two groups.

Keywords: restatement of internal control reports, financial statement restatements, CFO turnover, auditor resignation

Suggested Citation

Feng, Mei and Li, Chan and Raghunandan, Kannan and Sun, Lili, Restating Internal Control Reports following Financial Statement Restatements: Determinants and Consequences (August 16, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3908439

Mei Feng

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Chan Li (Contact Author)

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Kannan Raghunandan

Florida International University (FIU)

1101 Brickell Ave Ste 1100S
Miami, FL 33131-3113
United States

Lili Sun

University of North Texas - Department of Accounting ( email )

1155 Union Circle #305219
Denton, TX 76203-5017
United States
940-565-3077 (Phone)

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