Repeated engagement in misconduct by executives involved with financial restatements

We decompose the total value loss around firms’ announcements of financial restatements into components arising from investors’ revisions in cash flows and discount rates. First, relative to population benchmarks, restatements represent circumstances in which the cash flow component becomes more important in explaining valuations. While we find significant contributions from both sources, with the cash flow component explaining more than 33% of the variation in stock returns surrounding restatement announcements, this component explains only 13% to 22% in comparable non-restating firms. When restatements are caused by underlying financial fraud, the discount rate impact becomes more important, explaining about 88% of return variation. On the contrary, the cash flow impact is relatively larger for firms with higher earnings persistence or restatements associated with errors. Our decomposition of the value loss helps explain returns in the post-announcement period. Firms with a higher relative discount rate impact experience a significant downward stock price drift after the initial announcement-related price decline. For firms with a higher relative cash flow impact, the evidence suggests the initial impact of the restatement announcement is more complete with no subsequent drift pattern. Our findings close gaps in the evidence on financial restatements and extend the literature on the drivers of stock price movements.

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Managing reputation loss in China: in-depth analyses of financial restatements

Chinese Management Studies ◽

10.1108/cms-12-2015-0275 ◽

2016 ◽

Vol 10 (2) ◽

pp. 312-345 ◽

Cited By ~ 4

Author(s):

Peng Wu ◽

Lei Gao ◽

Zhibin Chen ◽

Xiao Li

Keyword(s):

Crisis Management ◽

Significant Relationship ◽

Stock Markets ◽

Financial Distress ◽

State Ownership ◽

Economic Consequences ◽

Content Type ◽

Financial Restatement ◽

Financial Restatements ◽

Crisis Responses

Purpose This paper aims to investigate, in China stock market, whether the reputation loss of a firm caused by financial restatements will lead to significant economic consequences such as financial distress and how a firm should respond to such a crisis. Design/methodology/approach This paper uses Chinese A-share listed firms from 2004 to 2013 as research samples to test research hypotheses using regression analyses. Findings This paper finds a significant relationship between restatements and financial distress, and such a relationship will be affected by both the type and the magnitude of restatements. More importantly, we find joint effects of restatements and state ownership on financial distress, which provides a unique contribution to the extant literature in restatement, financial distress and crisis management using Chinese stock markets data. It shows that ownership structure, affecting the firm reputation and crisis responses strategies, plays a significant role in consequences of restatements, and it is more important for state-owned enterprises (SOEs) to undertake an appropriate crisis response strategy to reduce the negative impact of restatements. Practical implications The results suggest that the damage to a firm’s reputation caused by restatements is affected by restatement type and state ownership. To reduce the negative consequences and avoid financial distress, firms should consider both the restatement type and their firm characteristics when deciding different actions to respond to restatements. In particular, SOEs should act in a more timely manner and take reputation-rebuilding actions such as taking the responsibility and making apologies and taking prompt remedial actions after restatements to regain the public trust and avoid more serious economic consequences. The Chinese government should strengthen their supervisions of SOEs and put more effort to help SOEs reduce administrative procedures, and to improve the efficiency of the implementation of recovery plans after restatements to reinstate firm credibility. Originality/value First, this paper is among the first to link financial restatement, including the type and magnitude of restatements, with financial distress, and the authors find a significant relationship between restatement type and financial distress in China stock markets. Second, this paper is the first to examine whether there is a joint effect of state ownership and restatements on financial distress. Third, this study examines how the magnitude and pervasiveness of restatements influence financial distress and find that both result in an increase of financial distress. Finally, this paper is among the first to connect crisis management and accounting literature to explain how a reputation loss caused by financial restatement may damage a firm’s value and subsequent performance, and based on which to suggest crisis-responses strategies.

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Is institutional investor a supervisor or cooperator?

Nankai Business Review International ◽

10.1108/nbri-02-2017-0007 ◽

2018 ◽

Vol 9 (1) ◽

pp. 2-18 ◽

Cited By ~ 1

Author(s):

Yuedong Li ◽

Xianbing Liu ◽

Qing Yan

Keyword(s):

Institutional Investors ◽

Institutional Investor ◽

Test Methods ◽

Future Research ◽

Management Turnover ◽

Content Type ◽

Financial Restatement ◽

Strategic Cooperation ◽

Financial Restatements ◽

The Relationship

Purpose The purpose of this paper is to discuss whether top management will assume their liabilities especially when financial restatement occurs, and,based on the “effective supervision theory” and “strategic cooperation theory,” to examine whether an institutional investor is a supervisor or a cooperator considering the management turnover caused by financial restatement in the companies. Design/methodology/approach Using a sample of the A-share-listed companies from year 2010 to year 2014 and dividing financial restatement into fraudulent financial restatement and other financial restatement, the authors examine the relationship between financial restatement and abnormal management turnover, which usually is related to the management integrity or capacity. By using group test methods, the authors test the influence of the institutional investors’ shareholding on the relation between financial restatements and management turnover. Findings This paper finds that financial restatement can result in abnormal management turnover, especially the fraudulent financial restatement. The institutional investors usually are supervisors but when the shareholding of institutional investor is too high and the management turnover results from fraudulent financial restatement, the institutional investors may become cooperators with management in the companies. Besides, the institutional investors play the supervisory function more significantly in non-state-owned enterprises. Originality/value This paper expands literature of the institutional investors in the corporate governance area and provides a basis for future research in the area of the institutional investors’ governance effect. It divides financial restatements into fraudulent financial restatement and other financial restatement and examines the relationship between financial restatement and abnormal management turnover so as to provide evidence about whether the management will assume their responsibilities when there is financial restatement in the company. It also tests whether the institutional investors will play supervisor’s or cooperator’s function in state-owned and non-state-owned enterprises.

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The Effect of Audit Committee Characteristics on Financial Restatements in Malaysia

Journal of Asia-Pacific Business ◽

10.1080/10599231.2018.1419043 ◽

2018 ◽

Vol 19 (1) ◽

pp. 4-22 ◽

Cited By ~ 1

Author(s):

Wan Masliza Wan Mohammad ◽

Shaista Wasiuzzaman ◽

Seyed Shahriar Morsali ◽

Rapiah Mohd Zaini

Keyword(s):

Audit Committee ◽

Financial Restatements

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Auditors' Responses to Classification Shifting: Evidence from U.S. Firms

Accounting Horizons ◽

10.2308/horizons-18-141 ◽

2021 ◽

Author(s):

Mai Dao ◽

Hongkang Xu ◽

Trung Pham

Keyword(s):

Earnings Management ◽

Audit Fees ◽

Real Earnings Management ◽

Audit Report ◽

Audit Opinion ◽

Income Statement ◽

Financial Restatements ◽

Classification Shifting ◽

Financial Misstatements

This study examines how auditors react to clients' engagement in classification shifting which refers to the intentional misallocation of line items within the income statement. We find that classification shifting is positively associated with audit fees, audit report lags, the issuance of a modified audit opinion, and auditor resignations. Additional analyses show that auditors' responses to multiple-year classification shifting are similar to our main findings. We further find that classification shifting is associated with a higher likelihood of financial misstatements in the classification shifting year, and future announcements of financial restatements. We also find that the probability of future restatements is even higher when audit clients engage in both classification shifting and real earnings management. Overall, our results imply that auditors become more cautious in response to audit clients' classification shifting behavior.

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A Shuffling Of The Guard: Audit Committee Exit As A Response To Financial Restatements

Academy of Management Proceedings ◽

10.5465/ambpp.2021.10192abstract ◽

2021 ◽

Vol 2021 (1) ◽

pp. 10192

Author(s):

Felipe Calvano Da Silva ◽

Joel Andrus ◽

Michael C. Withers ◽

Steven Boivie

Keyword(s):

Audit Committee ◽

Financial Restatements

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The Economic Consequences of Financial Restatements: Evidence from the Market for Corporate Control

The Accounting Review ◽

10.2308/accr-50869 ◽

2014 ◽

Vol 90 (1) ◽

pp. 1-29 ◽

Cited By ~ 29

Author(s):

Amir Amel-Zadeh ◽

Yuan Zhang

Keyword(s):

Corporate Control ◽

Economic Consequences ◽

Economic Resources ◽

Data Availability ◽

Matched Sample ◽

Market For Corporate Control ◽

Financial Restatements ◽

Main Driver ◽

Takeover Bids ◽

Jel Classifications

ABSTRACT This paper investigates whether and how financial restatements affect the market for corporate control. We show that firms that recently filed financial restatements are significantly less likely to become takeover targets than a propensity score matched sample of non-restating firms. For those restating firms that do receive takeover bids, the bids are more likely to be withdrawn or take longer to complete than those made to non-restating firms. Finally, there is some evidence that deal value multiples are significantly lower for restating targets than for non-restating targets. Our analyses suggest that the information risk associated with restating firms is the main driver of these results. Overall, this study finds that financial restatements have profound consequences for the allocation of economic resources in the market for corporate control. JEL Classifications: D82; G14; G34; M41. Data Availability: Data are available from sources identified in the paper.

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Consequences of the implementation of expanded audit reports with key audit matters (KAMs) on audit quality

Managerial Auditing Journal ◽

10.1108/maj-09-2019-2410 ◽

2020 ◽

Vol 35 (8) ◽

pp. 1095-1119

Author(s):

Weerapong Kitiwong ◽

Naruanard Sarapaivanich

Keyword(s):

Design Methodology ◽

Audit Quality ◽

Discretionary Accruals ◽

Regression Analyses ◽

Content Type ◽

Weak Evidence ◽

Financial Restatements ◽

Audit Reports ◽

The Impact ◽

Made In

Purpose This paper aims to ask whether the implementation of the expanded auditor’s report, which included a requirement to disclose key audit matters (KAMs) in Thailand since 2016, has improved audit quality. Design/methodology/approach To answer this question, the authors examined audit quality two years before and two years after its adoption by analysing 1,519 firm-year observations obtained from 312 companies. The authors applied logistic regression analyses to the firm-year observations. Findings The authors found some weak evidence that KAMs disclosure improved audit quality because of auditors putting more effort into their audits and audits being performed thoroughly after the implementation of KAMs. Interestingly, the number of disclosed KAMs and the most common types of disclosed KAMs are not associated with audit quality. Only disclosed KAMs related to acquisitions are more informative because the presence of this type of disclosed KAMs signals the greater likelihood of financial restatements being made in a later year. Originality/value Unlike previous studies on the impact of KAMs disclosure on audit quality, which used discretionary accruals as proxy for audit quality, this study used the occurrence of financial restatements.

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The Effect of Employee Treatment Policies on Internal Control Weaknesses and Financial Restatements

The Accounting Review ◽

10.2308/accr-51269 ◽

2015 ◽

Vol 91 (4) ◽

pp. 1167-1194 ◽

Cited By ~ 37

Author(s):

Jun Guo ◽

Pinghsun Huang ◽

Yan Zhang ◽

Nan Zhou

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Employee Benefits ◽

Data Availability ◽

Top Executives ◽

Material Weaknesses ◽

Financial Restatements ◽

Treatment Policies ◽

Employee Treatment

ABSTRACT This study investigates the role of employment policies in reducing internal control ineffectiveness and financial restatements. We provide new evidence that employee treatment policies are an important predictor of ineffective internal control. We also find that employee-friendly policies significantly reduce the propensity for employee-related material weaknesses. These results suggest that greater employee benefits facilitate the acquisition, development, and motivation of the workforce and ameliorate the loss of valuable human capital, thereby mitigating employee failures to implement internal control tasks properly. Moreover, we document novel results that financial restatements, especially those caused by unintentional errors, are less likely to arise in firms that invest more in employee benefits. Collectively, our emphasis on the effect of employee treatment policies on the integrity of internal control and financial reporting distinguishes our paper from previous studies that focus on the role of top executives in accounting practices. Data Availability: Data are available from public sources indicated in the text.

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