Predicting Material Accounting Misstatements
We examine 2,190 Securities and Exchange Commission Accounting and Auditing Enforcement Releases (AAERs) issued between 1982 and 2005. We obtain a comprehensive sample of firms that are alleged to have misstated their financial statements. We examine the characteristics of misstating firms along fiv...
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| Published in | Contemporary accounting research Vol. 28; no. 1; pp. 17 - 82 |
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| Main Authors | , , , |
| Format | Journal Article |
| Language | English |
| Published |
Oxford, UK
Blackwell Publishing Ltd
01.03.2011
CAAA Canadian Academic Accounting Association |
| Subjects | |
| Online Access | Get full text |
| ISSN | 0823-9150 1911-3846 |
| DOI | 10.1111/j.1911-3846.2010.01041.x |
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| Summary: | We examine 2,190 Securities and Exchange Commission Accounting and Auditing Enforcement Releases (AAERs) issued between 1982 and 2005. We obtain a comprehensive sample of firms that are alleged to have misstated their financial statements. We examine the characteristics of misstating firms along five dimensions: accrual quality, financial performance, nonfinancial measures, off-balance sheet activities, and market-based measures. We compare misstating firms to themselves during nonmisstatement years and misstating firms to the broader population of all publicly listed firms. We find that managers appear to be hiding diminishing performance during misstatement years. We find that accruals are high and that misstating firms have a greater proportion of assets with valuations that are more subject to managerial discretion. In addition, the extent of leasing is increasing and there are abnormal reductions in the number of employees. Misstating firms are raising more financing, have higher price-to-fundamental ratios, and have strong prior stock price performance. We develop a model to predict accounting misstatements. The output of this model is a scaled logistic probability that we term the F-score, where values greater than one suggest a greater likelihood of a misstatement. [PUBLICATION ABSTRACT] |
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| Bibliography: | ArticleID:CARE1041 istex:67CB22E7CA047CF11014C5256DA3CE19F43EDF59 Accepted by Michael Welker. We appreciate the comments of the workshop participants at the University of Michigan, the UBCOW Conference at the University of Washington, New York University 2007 Summer Camp, University of California, Irvine and University of Colorado at Boulder, Columbia University, University of Oregon, the Penn State 2008 Conference, University of California, Davis 2008 Conference, American Accounting Association meetings 2007, FARS 2008 meetings, the University of NSW Ball and Brown Conference in Sydney 2008, and the 2009 George Mason University Conference on Corporate Governance and Fraud Prevention. We thank Michael Welker (associate editor) and two anonymous referees for their helpful comments. We thank Ray Ball, Sid Balachandran, Sandra Chamberlain, Ilia Dichev, Bjorn Jorgensen, Bill Kinney, Carol Marquardt, Mort Pincus, and Charles Shi for their comments and Seungmin Chee for research assistance. We would like to thank the Research Advisory Board established by Deloitte & Touche USA LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP for the funding for this project. However, the views expressed in this article and its content are ours alone and not those of Deloitte & Touche USA LLP, Ernst & Young LLP, KPMG LLP, or PricewaterhouseCoopers LLP. Special thanks go to Roslyn Hooten for administering the funding relationship. This paper is dedicated to the memory of our colleague, friend, and research team member, Nader Hafzalla, who was a joy to all who knew him. ark:/67375/WNG-7TV2L8PL-X SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 14 ObjectType-Article-2 content type line 23 |
| ISSN: | 0823-9150 1911-3846 |
| DOI: | 10.1111/j.1911-3846.2010.01041.x |