The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence from Restatements Discussion of "The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence from Restatements PDF20160203-28064-J7XA1X

Title	The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence from Restatements Discussion of "The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence from Restatements
Author	Susan Scholz
Pages	42
File Size	128.7 KB
File Type	PDF20160203-28064-J7XA1X
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Summary

The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence from Restatements* ZOE-VONNA PALMROSE, University of Southern California SUSAN SCHOLZ, University of Kansas Abstract Our study examines the circumstances of non-GAAP financial reporting by 492 U.S. com- panies that announced re...

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Contemporary Accounting Research Vol. 21 No. 1 (Spring 2004) pp. 139–80 © CAAA The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence from Restatements* ZOE-VONNA PALMROSE, University of Southern California SUSAN SCHOLZ, University of Kansas Abstract Our study examines the circumstances of non-GAAP fnancial reporting by 492 U.S. com- panies 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 per- vasiveness 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, recur- ring 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 fnd a signifcant association between accounting items and litigation, whether occurrences or resolutions. Specifcally, 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. Keywords Core earnings; Earnings quality; Litigation JEL Descriptors K220, M400 * Accepted by Peter Easton. This paper was presented at the 2002 Contemporary Accounting Research Conference, generously supported by the CGA-Canada Research Foundation, the Canadian Institute of Chartered Accountants, CMA Canada — Ontario, the Certifed Gen- eral Accountants of Ontario, and the Institute of Chartered Accountants of Ontario. We grate- fully acknowledge the helpful comments of Michael Ettredge, Bill Kinney, Roger Martin, Linda McDaniel, Kevin Raedy, Brian Roundtree, Katherine Schipper, Ira Solomon, Michelle Yetman, and especially Jim Wahlen, and of workshop participants at the University of Kansas, Indiana University, the University of North Carolina, Washington University at St. Louis, the University of Southern California, the University of Iowa, and the 17th Annual CAR Conference; the research assistance of Michael James, Michael Kennington, and Jingjing Yao; and the fnancial assistance of the PricewaterhouseCoopers Foundation and BKD, LLP. Also, we have benefted from discus- sions with George Fritz, Guy Moore, Randy Noonan, Dave Pearson, and Tom Stemlar....