Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

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Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

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Title: Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting
Author: Srinivasan, Suraj; Wahid, Aida Sijamic; Yu, Gwen

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Citation: Srinivasan, Suraj, Aida Sijamic Wahid, and Gwen Yu. "Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting." Accounting Review (forthcoming). (This was Harvard Business School Working Paper, No. 13–034, October 2012.)
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Abstract: We study the frequency of restatements by foreign firms listed on U.S. exchanges. We find that the restatement rate of U.S. listed foreign firms is significantly lower than that of comparable U.S. firms and that the difference depends on the firm's home country characteristics. Foreign firms from countries with a weak rule of law are less likely to restate than are firms from strong rule of law countries. While the lower rate of restatements can represent an absence of errors, it can also indicate a lack of detection and disclosure of errors and irregularities. We infer the magnitude of detection and disclosure by associating the frequency of restatements with the quality of the firm's internal reporting system. We find that only U.S. firms and foreign firms from strong rule of law countries show a positive association between restatement frequency and internal control weaknesses. Firms from weak rule of law countries show no significant association. We interpret these findings as home country enforcement affecting firms' likelihood of detecting and reporting existing accounting irregularities. This suggests that for U.S. listed foreign firms, less frequent restatements can be a signal of opportunistic reporting rather than a lack of accounting errors and irregularities.
Published Version: http://dx.doi.org/10.2308/accr-50887
Other Sources: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2467371
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:10212561
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