Regulatory pressure to increase both audit committee financial expertise and board independence has resulted in lower status for audit committees relative to management. This status differential is relevant because expertise and relative status are important determinants of each party׳s ability to influence outcomes, particularly when parties face conflicting goals. We find that audit committees with both financial expertise and high relative status are associated with lower levels of earnings management, as measured by accounting irregularities and abnormal accruals. These results speak to benefits and limitations of financial expertise, which have been the focus of considerable debate.

We survey commercial bank lenders to better understand how they evaluate and react to variation in financial statement quality and how they view recent changes in accounting standards. A unique aspect of this study is that our respondents focus on medium‐size loans to private companies. In fact, more than 90 percent of the survey respondents primarily make credit decisions on loans between $250 thousand and $50 million. This is in contrast to prior archival research, which focuses primarily on very large loans to public firms or very small loans to private firms. We find that lenders in our sample distinguish among financial statements in terms of quality, including conservatism, primarily on the basis of accrual patterns and restatements. While this general result holds throughout our sample, financial statement quality is substantially more important for lenders making larger loans (over $10 million) as compared to very small loans (under $1 million). In addition, bank lenders are much more likely to respond to low‐quality reporting with collateral and guarantee requirements than with an increase in the interest rate charged. This finding is consistent for lenders making both larger and smaller loans. Finally, despite concerns in the academic literature, bank lenders in our sample actually hold a neutral‐to‐positive view of recent changes in accounting standards. In addition, most do not support current efforts to exempt private companies from some accounting standards.

ABSTRACT This study examines how frequently firms restate when they materially misstate their financial statements using stock option backdating as the setting. Stock option backdating provides a unique opportunity to study this issue because it is possible to estimate misstatements with publicly available information to a high level of confidence, and the extensive media coverage of backdating notified boards of directors of the significant risk of misstatement. After identifying firms that materially misstated earnings due to stock option backdating with 95 percent (99 percent) probability, we find that only 11.5 percent (16.1 percent) of these firms subsequently restated. Restating firms are larger, have greater board independence, higher litigation risk and ROA, a lower market‐to‐book ratio, less discretionary accruals, and are more likely to have a CFO that was not involved in backdating. Restating firms are also more likely to disclose other adverse news, face securities litigation, and turn over the CFO than firms that appear to materially backdate but do not restate. Since nearly 9 of 10 firms failed to restate, our results give pause to researchers who use restatements as an indicator of misreporting, and to regulators who levy penalties on those who do self‐report.

We examine whether performance reporting leads to inconsistent enforcement at the Securities and Exchange Commission (SEC). In a sample of over 13,000 SEC enforcement actions, we show that SEC staff respond to performance-reporting pressures and file more enforcement actions in September, the final month of the SEC's fiscal year, than in any other month. The increase in case volume in September is not fully explained by staff filing more procedural cases or accelerating case filings. Instead, SEC staff pursue less complex cases and agree to more lenient financial and non-financial sanctions to increase case volume in September. We attempt to rule out alternative explanations for our results, including natural SEC workflow and resource constraints. Overall, our findings suggest that performance reporting creates agency conflicts that lead to regulatory inconsistency within the fiscal year.