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Suraj Srinivasan
DBA in Accounting & Control

Dissertation Chair: Profs. P. Healy and
K. Palepu

Consequences of Financial Reporting Problems for Outside Directors: Evidence from Accounting Restatements

I use a sample of 304 companies that restate their earnings in 1997-2000 to examine penalties for outside directors, particularly audit committee members, when their companies experience accounting restatements. Penalties from lawsuits and SEC actions are very limited. However, directors experience significant labor market penalties. In the three years after the restatement, board turnover is 51% for firms that restate earnings downward, 29% for firms that restate upwards, and only 17% for technical restatement firms. For firms that overstate earnings, the likelihood of director departure increases in restatement severity, particularly for audit committee directors. In addition, directors of these firms lose 26% of their positions on other boards. This loss is greater for audit committee members and for more severe restatements. Overall, the evidence is consistent with outside directors, especially audit committee members, bearing reputational costs for financial reporting failure.

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