Capturing differences in conservatism following earnings restatements: further evidence from Tehran Stock Exchange

PurposeThe present study seeks to shed further light on the effectiveness of Basu (1997) and Khan and Watts' (2009) differential timeliness metrics in detecting predictable differences in conservatism following corrections of restated earnings.Design/methodology/approachUsing cross-sectional and time-series analyses for companies listed on the Tehran Stock Exchange during 2009–2013, the results indicate lower conservatism for restating firms as compared to their counterparts during prerestatement period.FindingsUsing cross-sectional and time-series analyses for companies listed on the Tehran Stock Exchange during 2009–2013, the results indicate lower conservatism for restating firms as compared to their counterparts during prerestatement period. In contrast, our findings are indicative of higher conservatism among these restating firms during the years of restatements. Moreover, the time-series approach captures a higher conservatism for the restating firms during restatement years than prerestatement periods. Overall, these results provide insight into the usefulness of the metrics used in the restatement setting.Originality/valueSimilar to recent papers, the present study seeks to shed further light on the ability of Basu-based coupled with Khan–Watts-based measures of conservatism to detect situations in which companies' earnings are known to be significantly restated.

An Empirical Assessment of Alternative Discretionary Accrual Models: Evidence from Earnings Restatements

Using a sample of firms that restated earnings, this study seeks to evaluate the performance of alternative discretionary accrual models along two dimensions: earnings management detection and accuracy (the ability to accurately estimate the magnitude of managed earnings). The findings of this study are important for three reasons. First, discretionary accrual models play a prominent role in several streams of accounting research, especially in earnings management research. Thus, the ability of discretionary accrual models to isolate the discretionary component from the non-discretionary component of total accruals is critical. Second, there is concern about earnings management inferences drawn from discretionary accrual estimates generated by existing discretionary accrual models. One major concern is that extant discretionary accrual models are mis-specified, which results in misleading inferences about earnings management behavior. Finally, there is lack of consensus in the literature on the relative performance of discretionary accrual models. Using earnings restatements data, I investigate the relative performance of four extant discretionary accrual models and a Modified Forward-Looking Model. The findings indicate that the Modified Forward-Looking Model is better specified and outperforms the other models both in terms of detecting earnings management and in estimating the magnitude of managed earnings.

Corporate Governance Consequences of Accounting Scandals: Evidence from Top Management, CFO and Auditor Turnover

This paper examines the consequences of accounting scandals to top management, top financial officers and outside auditors. We examine a sample of 518 U.S. public companies that announced earnings-decreasing restatements during the 1997–2002 period and an industry-size matched sample of control firms. Using logistic regressions that control for other determinants of management turnover, we find strong evidence of greater turnover of chief executive officers (CEOs), top management and chief financial officers (CFOs) of restating firms compared to the control sample. On average, over the three-year period surrounding the year of restatement announcement, CEOs and CFOs face, respectively, a 14% and 10% greater probability of being replaced in restating firms than in control firms, after controlling for other factors. These represent increases of about 42% and 23%, respectively, compared to the usual turnover probabilities for CEOs and CFOs. The magnitudes of these effects are even larger for restatements that are more serious, have worse effects on stock prices, result in negative restated earnings, are initiated by outside parties, are accompanied by Accounting and Auditing Enforcement Releases (AAERs), or trigger securities class action lawsuits. We find little systematic evidence that auditor turnover is higher in restating firms. Our paper provides evidence of effective functioning of internal governance mechanisms following accounting scandals.