Online from: 1988
|Title:||The importance of distinguishing errors from irregularities in restatement research: the case of restatements and CEO/CFO turnover|
|Author(s):||Hennes K M, Leone A J, Miller B P|
|Journal:||The Accounting Review, Nov 2008, Volume: 83 Issue: 6 pp.1487-1519 (33 pages)|
|Keywords:||Auditing, Errors, Financial Statements, Fraud, Quality, Usa|
|Article type:||Research paper|
|Reference:||38AG114 (Permanent URL)|
Design/methodology/approach - Argues prior research suffers from not distinguishing restatements properly. Develops three criteria for distinguishing errors from irregularities: (1) by detecting the use of 'fraud' or 'irregularity'; (2) by identifying linked official investigations of irregularity and (3) by identifying the presence of other independent investigations. Applies to all filings 2002-2005, and adds validation tests. Then links to turnover of chief executives (CEOs) or chief finance officers (CFOs), and extends to 1997-98.
Findings - Finds that restatements due to irregularities comprise 24% in 2002-2005, but 48% in 1997-1998, and exceed in number those identified by prior studies. Shows that the turnover of CEOs/CFOs has remained in line with the incidence of irregularities; and that the frequency of restatements due to errors has inceased.
Research limitations/implications - Urges researchers to adopt this method in order to increase the power of their tests for accounting irregularities.
Originality/value - Presents an improved way of separating villains from the careless.