Identifying Unintentional Error in Restatement Disclosures

June 3, 2013 Leave a comment

Identifying Unintentional Error in Restatement Disclosures

Louise Hayes University of Waterloo – School of Accounting and Finance

May 1, 2013

Abstract: 
Research attention is frequently focused on fraud and earnings management; however, unintentional errors in audited financial statements of public companies occur frequently. Currently, archival study of unintentional error is hampered by the lack of a refined error proxy. The purpose of this study is to develop a proxy for restatements that correct unintentional errors. Using an automated text search, I discover language asserting or implying lack of intent in 751 restatement announcements disclosed after enactment of the Sarbanes-Oxley Act of 2002 (SOX). I validate this proxy for restatements that correct unintentional error by analyzing differences in restatement characteristics and earning quality measures between these 751 restatements and 127 restatements that correct intentional misstatements which I identify by reading SEC Accounting and Auditing Enforcement Releases (AAERs). I find, relative to restatements that correct intentional misstatements, that the proxy for restatements that correct unintentional error is associated with proportionately fewer revenue recognition issues, less positive accruals, less income persistence, and a lower likelihood of meeting and beating analysts’ forecasts by a small amount. Future study of the associations between restatements that correct unintentional error and the expertise and incentives of CFOs, CEOs, audit committee members and auditors may lead to a more nuanced understanding of reporting quality. Thus, this validated proxy has the potential to contribute to future research and improvements in audit, internal control, and governance mechanisms.

Filed under Research

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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