Understanding the Restatement Process
37 Pages Posted: 11 Jan 2012
Date Written: January 10, 2012
Abstract
There has been much research on investors’ reactions to restatements and the effects of restatements on share prices; however, there has been little research on the processes involved in restating financial restatements. In this study, we investigated the process of issuing a restatement. We specifically focused on the interactions that took place between the parties involved (eg, CFO, the board, audit committee, audit partner, and regulators) in the determination and ultimate disposition of a restatement, as well as the impact of the restatement on the relationships between these parties. We investigated the restatement process via semi-structured interviews. We immersed ourselves in the restatement process by interviewing all parties typically involved, such as CFOs, auditors, consultants, and regulators. Given the findings in the auditor-client management negotiation area that suggests negotiation of accounting treatment and disclosure is frequent, we posit that negotiations or difficult discussions take place between the parties involved when determining if a restatement is necessary, as well as the ultimate restatement outcome. Our results indicate that the restatement process may influence or be influenced by such factors as: nature of the misstatement, who identified the misstatement, the reaction of the various parties to the misstatement, disagreement on whether to restate, communication with the regulator, the press release, client size, personality of the CFO, audit committee strength, and the relationship between the parties subsequent to the restatement.
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