An Analysis of the Underlying Causes Attributed to Restatements

The dramatic increase in the number of restatements filed over the past years has been attributed to numerous causes, including the complexity of the accounting standards, internal control reviews, changes in materiality thresholds, the overly conservative nature of auditors, earnings management, increased transaction complexity, and the second guessing of management judgments, by a variety of interested parties. However, empirical evidence on the underlying causes of restatements has been lacking. This study provides such evidence by directly addressing the questions of: (1) to what causes are restatements attributed, (2) to what characteristics of the accounting standards are restatements attributed, and (3) has the materiality threshold for restatements has fallen over the years? Relying on the restating companies’ disclosures about restatements, we find that companies most often attribute restatements to basic internal company errors unrelated to any specific characteristic of the accounting standards. We also find that, for those restatements attributed to some characteristic of the accounting standards, the primary contributing factor is the lack of clarity in applying the standards and/or the proliferation of the literature due to the lack of clarity in the original standard. These findings should be of interest to standard setters and regulators in addressing the proliferation of restatements and to academics in using restatements as proxies for constructs of interest in research.