Revisions versus Restatements: Managerial Discretion in Materiality Assessments
2017-08
Loading...
View/Download File
Persistent link to this item
Statistics
View StatisticsJournal Title
Journal ISSN
Volume Title
Title
Revisions versus Restatements: Managerial Discretion in Materiality Assessments
Authors
Published Date
2017-08
Publisher
Type
Thesis or Dissertation
Abstract
In recent years, firms reporting revisions of prior financial statements outnumber firms reporting restatements. Accounting rules require material misstatements to be transparently disclosed as restatements, whereas immaterial errors/irregularities can be reported as revisions. Given the discretion allowed in materiality assessments, I examine whether firms conceal material misstatements as revisions to avoid the negative consequences of formal restatements. Based on regulatory guidance and widely used materiality benchmarks, I find that almost 40% of revisions meet at least one materiality criterion. These “material” revisions elicit a more negative market response relative to immaterial revisions, suggesting that the market perceives these misstatements as consequential. I further find that misstatements that allow for high materiality discretion are more likely to be revised rather than restated and that these revisions are associated with managements’ strategic incentives. Specifically, these misstatements are more likely to be reported as revisions when the firm has compensation clawback provisions, strong capital market pressure, and when past performance is negatively impacted. In addition, I show a significant increase in the propensity to revise rather than restate after an SEC report that encourages even more discretion in the materiality assessment. Overall, my results suggest that materiality discretion can be used opportunistically to conceal material misstatements as revisions which has implications for the FASB's proposed change to materiality guidance.
Keywords
Description
University of Minnesota Ph.D. dissertation. August 2017. Major: Business Administration. Advisor: Pervin Shroff. 1 computer file (PDF); 7iv, 72 pages.
Related to
Replaces
License
Collections
Series/Report Number
Funding information
Isbn identifier
Doi identifier
Previously Published Citation
Suggested citation
Thompson, Rachel. (2017). Revisions versus Restatements: Managerial Discretion in Materiality Assessments. Retrieved from the University Digital Conservancy, https://hdl.handle.net/11299/191430.
Content distributed via the University Digital Conservancy may be subject to additional license and use restrictions applied by the depositor. By using these files, users agree to the Terms of Use. Materials in the UDC may contain content that is disturbing and/or harmful. For more information, please see our statement on harmful content in digital repositories.