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The Timeliness of Restatement Disclosures and Financial Reporting Credibility

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  • Mark Hirschey
  • Kevin R. Smith
  • Wendy M. Wilson

Abstract

This study investigates whether prompt discovery and disclosure of earnings restatements is associated with greater post-restatement financial reporting credibility. We measure the timeliness of restatement detection by the length of time between the end of the misstated period and the subsequent restatement announcement. We document that shorter detection periods are significantly associated with high-quality corporate governance characteristics and executive and/or auditor turnover, but not with characteristics of restatements. We also find that firms with shorter detection periods exhibit a more moderate decline in the information content of earnings following restatement announcements relative to firms with longer detection periods, and that detection period length has an incremental effect on the information content of earnings relative to executive and/or auditor turnover alone. In addition, we find that restatement disclosures are more timely following the implementation of the SOX-era reforms, and that only firms with shorter detection periods experience more moderate post-restatement declines in the information content of earnings following the implementation of the SOX-era reforms. The results from this study suggest that the timeliness of restatement detection and disclosure is associated with greater financial reporting credibility following restatements.

Suggested Citation

  • Mark Hirschey & Kevin R. Smith & Wendy M. Wilson, 2015. "The Timeliness of Restatement Disclosures and Financial Reporting Credibility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(7-8), pages 826-859, September.
    • Handle: RePEc:bla:jbfnac:v:42:y:2015:i:7-8:p:826-859
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    File URL: http://hdl.handle.net/10.1111/jbfa.12125
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    Cited by:

    1. Zvi Singer & Jing Zhang, 2022. "Do companies try to conceal financial misstatements through auditor shopping?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(1-2), pages 140-180, January.
    2. Anna M. Cianci & Shana M. Clor-Proell & Steven E. Kaplan, 2019. "How Do Investors Respond to Restatements? Repairing Trust Through Managerial Reputation and the Announcement of Corrective Actions," Journal of Business Ethics, Springer, vol. 158(2), pages 297-312, August.
    3. John Goodwin & Yigit Atilgan & Serif Aziz Simsir & Kamran Ahmed, 2020. "Investor reaction to accounting misstatements under IFRS: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2467-2512, September.
    4. Marie Herly & Jan Bartholdy & Frank Thinggaard, 2020. "A re‐examination of accruals quality following restatements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 882-909, July.
    5. Juan Mao & Zhongxia (Shelly) Ye, 2023. "Internal control material weakness disclosure and misstatement duration," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(1-2), pages 118-151, January.

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