Restatements

Written for an encyclopedia on European private law, this brief article first addresses the term restatements and then compares the U.S. Restatement of the law as prototype with different European restatements of the law in the area of private law

Creating Legitimacy for Sustainability Assurance Practices: Evidence from Sustainability Restatements

This is the author accepted manuscript. The final version is available from Taylor & Francis (Routledge) via the DOI in this record.This study examines sustainability reporting assurance (SRA) provider use of sustainability restatements as a means to create legitimacy in the developing SRA market. In comparison to financial data, mistakes in sustainability reporting are more likely to be made and less likely to be discovered prior to reporting. A lack of clear reporting standards and ambiguous SRA guidelines create a setting where providers can use restatements in an attempt to demonstrate both a problem in sustainability reporting and assurance as the solution to that issue. Based on a sample of U.S. firms from 2010–14, we find that SRA is associated with an increased likelihood of sustainability restatements, that the association is stronger for error restatements than for restatements due to methodological updates, and that SRA is significantly associated with the disclosure of quantitatively non-material restatements. We also document differences in these relations across provider-type, with only consultant assurance significantly associated with methodological restatements and restatements of a non-material amount. Our findings support differences between sustainability report restatements and financial restatements, and provide evidence in support of our argument that assurance providers may be using restatements in an attempt to expand market share in a new professional space.We also gratefully acknowledge the 2014 Best Paper Prize awarded by the PRI Stichting Foundation at the 2nd GARI International Conference (Henley Business School) and financial support from the University of Exeter Firms, Markets and Value Research Cluster and the School of Accounting, Rawls College of Business at Texas Tech University

Corporate investments: Learning from restatements

This study analyzes the information conveyed by the restatements of financial reports. We argue that restatements contain news about the investment projects of the restating firms’ competitors. This news causes competitors to revise their beliefs about the projects’ value, and to modify their subsequent investment decisions. Accordingly, we hypothesize that changes in competitors’ investments after restatement announcements are related to news in the restatements. Consistent with our prediction, we find that changes in competitors’ investments following restatement announcements are significantly related to various proxies for news in the restatements, such as competitors’ and restating firms’ abnormal returns at the restatement announcements. We conclude that restatements convey information about the investment projects of restating firms’ competitors

The Informational Content And Valuation Ramifications Of Earnings Restatements

This paper analyzes the market responses to different categories of accounting restatements.  Accounting restatements have been occurring with increasing frequency in recent years, generating significant discussion as to their causes and consequences.  We examine both of these dimensions of restatements.  We identify 9 categories into which restatements can be classified.  When examining their valuation consequences, we find statistically significant negative revaluations for the overall sample. However, there is substantial variation in valuation changes across the various categories of restatements.  Investors react the most negatively to restatements resulting from accounting issues (i.e. errors/irregularities/method-changes).  This is greatly magnified when there is a contemporaneous change in the firm’s CEO.  At the other end of the spectrum, we find positive reactions to restatements that reflect and provide the accounting calibration of previously announced settlements of legal issues.  A notable feature of the findings is that for some categories there are valuation changes in response to accounting restatements which are seemingly just recording the implications of previously announced corporate happenings.  In the context of efficient market perspectives, some of these changes at the time of the restatement announcement itself are somewhat surprising

Characteristics of Non-Audit Services and Financial Restatements in Malaysia

Various types of purchased non-audit services (NAS) and their recurring nature affect the likelihood of financial statement restatements in Malaysia. Based on 953 firm-year observations during the period 2007–2009, evidence of a negative relationship between non-audit fees and financial statement restatements is provided. The purchase of both tax-related and audit-related NAS decreases the likelihood of restatements. Recurring (as opposed to non-recurring) tax-related and audit-related NAS are negatively and significantly related to the likelihood of restatements. These findings support our hypothesis that both types of NAS and their recurrence provide knowledge spillover, which enhances audit and financial reporting quality. When considering institutional settings, we find that politically connected firms are more likely to require financial restatements than non-politically connected firms, while audit committee independence and the purchase of tax-related, recurring tax-related and other NAS decrease this likelihood. The purchase of audit-related and recurring audit-related NAS and non-recurring other NAS decreases the likelihood of restatements for non-politically connected firms

Trends in Reasons for Restatements

Business/Education/Speech and Hearing Science (The Ohio State University Denman Undergraduate Research Forum)In 2014, more than 500 companies or over 3% of all public companies filed a Form 8-K Item 4.02 disclosure indicating that a previously issued financial statement should not be relied upon due to a material error. These material errors mislead investors, creditors, and other stakeholders. Therefore, such a company is subsequently required to issue corrected financial statements through a Form 10-K/A disclosure. By understanding the underlying errors that drive companies to restate, accountants can take actions to minimize the quantity of restatements. Previous research has examined the relationship between the passage of time and the number of restatements. This study adds to the discussion by describing reasons that companies restate and the associated trends. Audit Analytics database provided by Wharton Research Data Services was used to analyze all Item 4.02 disclosures from 2004 to 2014. These restatements were classified by whether clerical error, fraud, accounting error, or another type of error led the company to restate their financials. The results indicate that the proportion of restatements explained by clerical errors has fallen from over 14% in 2008 to about 1% in 2014. The proportion of restatements explained by fraud has fallen from over 3% in 2004 to under 1% in 2014. As a result, the proportion of restatements explained by accounting errors has increased from about 86% in 2008 to over 98% in 2014. These results are consistent with the presumption that increased regulation, technology, and education may reduce fraud and clerical error over time. The total number of restatements has more than doubled since 2008 despite evident decreases in the proportion of restatements explained by clerical error and fraud. As the proportion of restatements explained by accounting errors predominates, actions must be taken to reduce accounting error and consequently diminish the total number of restatements.Academic Major: Accountin

Relying on Restatements

Restatements of the Law occupy a unique place in the Americanlegal system. For nearly a century, they have played a prominent and influential role as legal texts that courts routinely rely on in a wide variety of fields. Despite their ubiquitous and pervasive use by courts, Restatements are not formal sources of law. While they resemble statutes in their form and structure, Restatements are produced entirely by a private organization of experts set up to clarify and simplify the law and thus lack the force of law on their own. And yet, courts treat them as formal and authoritative sources of law, a reality that has thus far received hardly any systematic scrutiny. As this Article argues, courts’ anomalous treatment of Restatements routinely distorts the process of common law development by introducing a plethora of institutional problems into the fray and has in recent years produced needless controversy about the utility of the Restatements themselves. This Article unravels the complexity and pitfalls of the unique legal authority embodied in Restatements, which elides the traditional categories of authority that courts are familiar with. It argues that the working of this unique legal authority is masked by the manner in which Restatements seek to emulate the language, form, and structure of ordinary statutes, despite crucial differences between the two. Courts have in turn been taken by the Restatements’ combination of substantive content and statute-like formulation and resorted to a variety of different techniques of reliance in their use of Restatements, many of which unwittingly limit their own lawmaking power in the common law over time. The Article then proposes a set of Restatement-specific canons of construction for courts to use in their reliance on the text of Restatements, each of which is tailored to the unique nature of authority invested in them

An Analysis of Restatements Due to Errors and Auditor Changes by Fortune 500 Companies

Events leading to the breakup of Arthur Anderson and Co. included the failure of Enron and other evidence of financial reporting irregularities. Many of these irregularities involved restatement of financial statements due to error. During the last several years, numerous articles in the accounting literature and accounting press have chronicled such restatements and the often associated change in auditor. This paper analyzes restatements due to error and auditor changes made by Fortune 500 companies during 2001 and 2002 in order to assess whether restatements due to error lowered or raised income and whether companies with income-decreasing errors showed a greater propensity for changing auditors. The data in this study were taken from 8-K reports filed by Fortune 500 Companies in 2001 and 2002 and from a search of the Securities and Exchange Commission\u27s EDGAR database using the word restate and its derivatives. We searched for and analyzed restatements that were due to error. The income statement effects of these restatements were classified as income-decreasing or as non income-decreasing. We identified and confirmed two hypotheses related lo restatements. First, restatemenls generally lowered rather than raised income. Second. companies reporting restatements that materially reduced income were more likely to change auditors than companies with non income-decreasing errors. More importantly. this study extended prior research by showing that the magnitude, not simply the direction, of a restatement was important in explaining when a change in auditor was likely lo occur

Predicting Forced Financial Restatement: Evidence from the Malaysian Capital Market

Historical precedent shows that forced financial restatements can have serious implications for the firm affected, investor confidence in financial markets and a country’s economic development more generally. The purpose of this study is to explore factors which affect the likelihood of forced financial restatements. This issue is particularly pertinent in the Malaysian context, as, despite repeated efforts by the government to improve the corporate governance of listed companies, weak regulatory enforcement and the influence of family groups and politicians give rise to continued concerns about financial reporting quality. This study uses the multivariate logit model to analyse firm characteristics which relate to forced financial restatement. The analysis was performed on the Malaysian listed companies from 2002 to 2012. Findings indicate that the likelihood of forced restatements was related to aggressive accounting practices. In addition, the presence of politically-connected shareholders or top executives, the proportion of independent directors on the board, firms’ decreasing level of internal fund and share price volatility were also related to an increased likelihood of forced restatement. More detail tests on the attributes of the different types of restatement show that the likelihood of income-increasing and zero-effect forced restatement event were affected by opportunistic earnings management practices. This contradicts with the results shown for forced income decreasing restatement as they do not imply aggressive accounting, but are more likely to result from mistakes or technical accounting matters, such as change in accounting policy. This study contributes to our understanding by examining a much wider range of financial and non-financial factors as possible determinants of forced restatements. Moreover, compared to prior research, this study explores forced income-decreasing, income-increasing, as well as zero-effect restatements to distinguish between earnings restatements that arise from related to opportunistic behaviour and those linked to accounting errors. Methodologically, this study further contributes by applying the penalised likelihood logit and structural equation modelling approach which are scarcely examined in accounting research, to determine factors affecting the likelihood of forced restatements. It was not possible to develop a valid predictive model for forced financial restatements which is recognised as a limitation to the study. However, the findings in this study do provide some insights into factors which relate to the likelihood of forced restatements, which should be useful for investors, analysts, auditors, and regulators