The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence from Restatements
University of Southern California
University of Kansas - Accounting and Information Systems Area
Contemporary Accounting Research, Vol. 21, No. 1, Spring 2004
Our study examines the circumstances of non-GAAP financial reporting by 492 U.S. companies that announced restatements from 1995 to 1999. We analyze the occurrence and resolution of litigation over restatements; and, we explore the role of accounting items in bringing and resolving this litigation. To do so, we focus on the income statement. We provide evidence on the nature and pervasiveness of accounting misstatements and how, if at all, they affect litigation. We assess the nature of restatements by whether normal, recurring earnings from primary perations (core) or other components of earnings (non-core) are misstated and their pervasiveness by estimating the number of primary accounts misstated.
In our sample, companies with core restatements have higher frequencies for intentional misstatements (fraud) and subsequent bankruptcy or delisting. They likewise have, on average, more material misstatements, more negative security price reactions to restatement announcements, and more negative security price changes over the six months preceding and following restatement announcements. However, controlling for these and other factors, we find a significant association between accounting items and litigation, whether occurrences or resolutions. Specifically, core restatements - driven primarily by revenue misstatements, a component of core earnings - and more pervasive restatements each play a role, while misstatements of non-core earnings alone do not.
Keywords: Litigation, Core Earnings, Earnings Quality
JEL Classification: M41, M43, M44, K22
Date posted: November 19, 2003