Regulatory officials and market analysts have speculated that the loss of credibility in subsequently reported financial information is a long-lasting consequence of earnings restatements. I measure the information content of earnings using a standard earnings-returns framework over several years surrounding restatements to examine characteristics of the decline in the information content of earnings. Results indicate that although the information content of earnings declines following restatements, the loss is temporary. In particular, the earnings response coefficients for earnings announcements surrounding restatements exhibit a U-shaped pattern in which they are no longer significantly lower in the post-restatement period over an average of four quarters. The extent to which the earnings of restatement firms suffer a loss of information content varies across several dimensions. First, the duration of the loss is greater for firms that restate earnings to correct revenue recognition errors and for restatements that result in a large decline in the stock price at the announcement date. Second, there is not a loss in the information content of earnings for firms that make changes to their financial reporting governance structures following restatements. Overall, the evidence in this paper is consistent with a short-term decline in investor confidence regarding financial reporting following restatements, but shows that suspicion regarding the information loss of post-restatement earnings in the long-term is unwarranted.

A report issued by the U.S. General Accounting Office (GAO) in 2003 identified auditors’ industry expertise as a critical factor for firms choosing an auditor, and highlighted the extreme levels of auditor concentration in some industries. We posit that the investment opportunity set (IOS) plays a fundamental role in determining whether an industry is an attractive target for auditor specialization. When industry-specific IOS is high, specialist auditors make costly investments in industry-specific knowledge, allowing them to offer a differentiated product and to create entry barriers for other audit firms. When the IOS of firms within an industry is relatively homogeneous, auditors can transfer such knowledge across clients in the industry more easily, resulting in cost savings and scale economies. However, greater homogeneity of IOS in an industry can also increase a client’s aversion to sharing an auditor with its competitors because of concerns about transfers of proprietary information, suggesting that industries with relatively homogeneous IOS are less likely to be dominated by a single auditor. We show that auditor concentration in an industry relates positively to both the level and homogeneity of IOS in the industry, while auditor dominance relates negatively to industry IOS homogeneity. Further, we find that audit fees are positively associated with both levels and homogeneity of industry IOS.

The purpose of this study is to examine the frequency, determinants, and implications of misreported fundraising activities. We compare state telemarketing campaign reports with the associated information from nonprofits' annual Form 990 filings to directly test nonprofits' revenue and expense recognition policies. Using a conservative approach that understates the extent to which nonprofit organizations violate the reporting rules, our study indicates that 74 percent of the regulatory filings from nonprofit organizations fail to properly report telemarketing expenses. Smaller nonprofits, less monitored firms, and those with less accounting sophistication are more likely to inappropriately report telemarketing costs as a component of net revenues rather than as expenses. Nonprofits that use external accounting services are more likely to properly classify the cost of their telemarketing campaigns as professional fundraising fees.

We examine the design of asset revaluation policies in settings where a regulator can mandate fair value disclosure in order to mitigate a lemons problem in the asset resale market. The welfare-maximizing policy generally prescribes fair value certification for the lower asset values and (less costly) historical cost reporting for the higher asset values. The potential for voluntary certification can reduce welfare by increasing equilibrium certification costs and promoting underinvestment in socially valuable projects. Thus, a single regulated source of information (mandated disclosure) can be preferable to two sources of information (mandated and voluntary disclosure).

Research on restatements has grown significantly in recent years. Many of these studies test hypotheses about the causes and consequences of intentional managerial misreporting but rely on restatement data (such as the GAO database) that contains both irregularities (intentional misstatements) and errors (unintentional misstatements). We argue that researchers can significantly enhance the power of tests related to restatements by distinguishing between errors and irregularities, particularly in recent periods when the relative frequency of error-related restatements is increasing. Based on prior research, the reading of numerous restatement announcements, and the guidance that boards receive from lawyers, auditors, and the SEC on how to respond to suspicions of deliberate misreporting, we propose a straightforward procedure for classifying restatements as either errors or irregularities. We show that most of the restatements we classify as irregularities are followed by fraud-related class action lawsuits as compared to only one lawsuit in the group of restatements classified as errors. As further validation of our proxy, we report that the market reaction to the restatement announcement for our irregularities sample (−14 percent) is also significantly more negative than it is for our errors sample (−2 percent). Finally, we demonstrate the importance of distinguishing errors from irregularities by showing the impact it has on inferences about the relation between restatements and CEO/CFO turnover over time.

Prior research indicates that audit and tax professionals' judgments are influenced by their client's preferences, both directly and indirectly (via information search). In an experiment with tax professionals as participants, we examine whether high practice risk (i.e., exposure to monetary and nonmonetary costs of making inappropriate recommendations) mitigates these effects. We find that, when facing a client with low practice risk, professionals' search is biased in a manner that leads judgments to be consistent with client preference; however, search is less biased when facing a client with high practice risk, and resulting judgments are less consistent with client preference. We also find that, after controlling for the impact of information search, professionals tend to adjust their recommendations away from the client-preferred position, regardless of practice risk. This study sheds light on the direct and indirect paths by which client preference and practice risk affect professionals' judgments.

This paper examines whether industry efforts to decrease managerial discretion, increase uniformity, and improve transparency of a non-GAAP performance measure change voluntary disclosure and market perceptions. We find that the frequency of REITs meeting or beating analysts' expectations of funds from operations (FFO) decreases following explicit industry initiatives to discourage manipulation. Concurrent with this shift, we find that the information content of FFO to investors increased, particularly for firms reporting a reconciliation of FFO with GAAP earnings. We also examine firms in other industries to assess alternative explanations for these results, such as SEC intervention. Collectively, our findings suggest that industry guidance about non-GAAP performance curtailed managers' opportunistic reporting. Furthermore, the market response to FFO is consistent with investors perceiving less manipulation and greater reliability. Our evidence also supports the SEC's subsequent requirement that all non-GAAP disclosures be reconciled to the nearest GAAP measures.