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  • May 2015
  • Article
  • Accounting Review

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

By: Suraj Srinivasan, Aida Sijamic Wahid and Gwen Yu
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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.

Keywords

Accounting Restatements; Home Country Enforcement; Earnings Management; Globalized Firms and Management; Law; Financial Reporting; Financial Markets; Cross-Cultural and Cross-Border Issues

Citation

Srinivasan, Suraj, Aida Sijamic Wahid, and Gwen Yu. "Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting." Accounting Review 90, no. 3 (May 2015): 1201–1240.
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About The Author

Suraj Srinivasan

Accounting and Management
→More Publications

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More from the Authors
  • The Opioid Settlement and Executive Pay at AmerisourceBergen By: Suraj Srinivasan and Li-Kuan Ni
  • Ginkgo Bioworks vs. Scorpion Capital: The Debate Over Related-Party Revenues By: Aiyesha Dey, Jonas Heese, Suraj Srinivasan and Annelena Lobb
  • Creating and Measuring Purpose at Viega By: Ethan Rouen and Suraj Srinivasan
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