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SYNOPSIS: The dramatic increase in the number of restatements filed over the past years has been attributed to numerous causes, including the complexity of the accounting standards, internal control reviews, changes in materiality thresholds, the overly conservative nature of auditors, earnings management, increased transaction complexity, and the second-guessing of management judgments by a variety of interested parties. However, empirical evidence on the underlying causes of restatements has been lacking. This study provides such evidence by directly addressing these questions: (1) To what causes do companies attribute restatements? (2) To what characteristics of the accounting standards do companies attribute restatements? Relying on the restating companies' disclosures about restatements, we find that companies most often attribute restatements to basic internal company errors unrelated to any specific characteristic of the accounting standards. We also find that, for those restatements attributed to some characteristic of the accounting standards, the primary contributing factor is the lack of clarity in applying the standards and/or the proliferation of the literature because the original standard lacked clarity. These findings should interest standard setters and regulators addressing the proliferation of restatements and academics using restatements as proxies for constructs of interest in research.
Keywords: restatement; restatement causes; accounting standards; accounting complexity.
Data Availability: The data are available from public sources.
JEL Classifications: K22; M41; M43; M49.
INTRODUCTION
Accounting restatements have been filed at record levels in the past few years: Glass Lewis & Co. (2006) documents that 1,538 restatements were filed in 2006, more than three times the 475 restatements filed in 2003. Although the rapid increase in the number of restatements filed in the United States is apparent, a significant debate remains regarding the underlying cause of this increase. Various groups have posited plausible reasons for restatements, including accounting complexity, second-guessing of management judgment, proliferation of accounting rules and implementation guidance, application of the Sarbanes-Oxley Act of 2002 (SOX) Section 404 requirements, transaction complexity, and earnings management. The various constituents have also suggested specific measures that could be taken to reduce restatements based on the causes suggested. However, measures proposed to curtail restatements based on one suggested cause may contradict measures proposed based on another suggested cause. This conflict highlights the necessity for first understanding the underlying cause of restatements before implementing...