The Importance of Distinguishing Errors from Irregularities in Restatement Research: The Case of Restatements and CEO/CFO Turnover

Posted: 9 Jan 2007 Last revised: 13 May 2014

See all articles by Karen M. Hennes

Karen M. Hennes

University of Oklahoma - School of Accounting

Andrew J. Leone

University of Miami

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting

Date Written: November 1, 2008

Abstract

Research on restatements has grown significantly in recent years. Many of these studies test hypotheses about the causes and consequences of intentional managerial misreporting but rely on restatement data (such as the GAO database) that contains both irregularities (intentional misstatements) and errors (unintentional misstatements). We argue that researchers can significantly enhance the power of tests related to restatements by distinguishing between errors and irregularities, particularly in recent periods when the relative frequency of error-related restatements is increasing. Based on prior research, the reading of numerous restatement announcements, and the guidance boards receive from lawyers, auditors, and the SEC on how to respond to suspicions of deliberate misreporting, we propose a straightforward procedure for classifying restatements as either errors or irregularities. We validate our procedure by showing that most of the restatements we classify as irregularities are followed by fraud-related class action lawsuits compared to only one lawsuit in the group of restatements classified as errors. As further validation of our proxy, we report that the market reaction to the restatement announcement for our irregularities sample (-14%) is also significantly more negative than it is for our errors sample (-2%). Finally, we demonstrate the importance of distinguishing errors from irregularities by showing the impact it has on inferences about the relation between restatements and CEO/CFO turnover even when controlling for the magnitude of the restatement.

Keywords: CEO Turnover, restatements, CFO Turnover

JEL Classification: M41, M43, G34, G38

Suggested Citation

Hennes, Karen M. and Leone, Andrew J. and Miller, Brian P., The Importance of Distinguishing Errors from Irregularities in Restatement Research: The Case of Restatements and CEO/CFO Turnover (November 1, 2008). Accounting Review, Vol. 83, No. 6, 2008. Available at SSRN: https://ssrn.com/abstract=948929

Karen M. Hennes

University of Oklahoma - School of Accounting ( email )

Norman, OK 73019-4004
United States

Andrew J. Leone (Contact Author)

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2606 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
4,977
PlumX Metrics