The Circumstances and Legal Consequences of Non‐GAAP Reporting: Evidence from Restatements *

The Circumstances and Legal Consequences of Non‐GAAP Reporting: Evidence from Restatements * Our study examines the circumstances of non‐GAAP financial reporting by 492 U.S. companies that announced restatements from 1995 to 1999. We focus on income statements to analyze the occurrence and resolution of litigation over restatements and explore the role of accounting items in bringing and resolving this litigation. We provide evidence on the pervasiveness of accounting misstatements, describe their nature, and show how, if at all, they affect litigation. We assess the nature of restatements by determining whether regular, recurring earnings from primary operations (core) or other components of earnings (noncore) are misstated, and we assess their pervasiveness by estimating the number of primary accounts misstated. In our sample, companies with core restatements have higher frequencies of intentional misstatements (fraud) and subsequent bankruptcy or delisting. Likewise, these companies have, on average, more material misstatements, more negative security price reactions to restatement announcements, and more negative security price changes over the six months preceding and following restatement announcements. However, controlling for these and other factors, we find a significant association between accounting items and litigation, whether occurrences or resolutions. Specifically, core restatements — driven primarily by misstatements of revenue, a component of core earnings — and more pervasive restatements each play a role, while misstatements of noncore earnings alone do not. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

The Circumstances and Legal Consequences of Non‐GAAP Reporting: Evidence from Restatements *

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Publisher
Wiley
Copyright
2004 Canadian Academic Accounting Association
ISSN
0823-9150
eISSN
1911-3846
D.O.I.
10.1506/WBF9-Y69X-L4DX-JMV1
Publisher site
See Article on Publisher Site

Abstract

Our study examines the circumstances of non‐GAAP financial reporting by 492 U.S. companies that announced restatements from 1995 to 1999. We focus on income statements to analyze the occurrence and resolution of litigation over restatements and explore the role of accounting items in bringing and resolving this litigation. We provide evidence on the pervasiveness of accounting misstatements, describe their nature, and show how, if at all, they affect litigation. We assess the nature of restatements by determining whether regular, recurring earnings from primary operations (core) or other components of earnings (noncore) are misstated, and we assess their pervasiveness by estimating the number of primary accounts misstated. In our sample, companies with core restatements have higher frequencies of intentional misstatements (fraud) and subsequent bankruptcy or delisting. Likewise, these companies have, on average, more material misstatements, more negative security price reactions to restatement announcements, and more negative security price changes over the six months preceding and following restatement announcements. However, controlling for these and other factors, we find a significant association between accounting items and litigation, whether occurrences or resolutions. Specifically, core restatements — driven primarily by misstatements of revenue, a component of core earnings — and more pervasive restatements each play a role, while misstatements of noncore earnings alone do not.

Journal

Contemporary Accounting ResearchWiley

Published: Mar 1, 2004

References

  • GAAP versus the street: An empirical assessment of two alternative definitions of earnings
    Bradshaw, Bradshaw; Sloan, Sloan
  • Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC
    Dechow, Dechow; Sloan, Sloan; Sweeney, Sweeney
  • Determinants of market reactions to restatement announcements
    Palmrose, Palmrose; Richardson, Richardson; Scholz, Scholz
  • Earnings disclosures and stockholder lawsuits
    Skinner, Skinner

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