Abstract
The aim of manuscript is to analyze and identify determinants of honest accounting errors leading to financial restatements based on data from SEC database and from annual reports. Reason for this study is that accounting errors are expensive for companies that need to change already published financial statements and have impact on company reputation and stock price. Most of authors focus on prediction of accounting frauds and financial restatements remain in the background of research. This study initially tests existing accounting fraud detection model of Beneish on a sample of 40 financial restatement companies over 10 years and develops two new pioneer prediction models, one based on linear discriminant analysis (LDA) and another based on logistic regression. In testing dataset, LDA model has achieved accuracy 70.96%, specificity 25.00% and sensitivity 79.83% and logistic regression model has achieved accuracy 62.22%, specificity 41.66% and sensitivity 66.67%, performance of both models is better than existing Beneish model or other studies in this field. Developed models can be widely used by both internal and external users of financial statements, who would like to determine if financial statements of analyzed company include accounting errors or not, thanks to easily interpretable results in equation form.
Highlights
Key aim of financial statements that are prepared meaningfully is that financial statements are comparable to financial statements of other companies
These findings suggest that when unlisted companies issue bonds and borrow money, IFRS adoption contributes to decreasing the cost of this debt
To reduce the number of dimensions for tested models and to exclude some statistically insignificant variables, differences between companies with financial restatements and without restatements have been tested by doublesided t-test
Summary
Key aim of financial statements that are prepared meaningfully is that financial statements are comparable to financial statements of other companies. This is even more important for a solid and correct comparison of companies in the same industry. The main difference is in the root cause of financial restatement or accounting fraud It must be determined if an honest accounting, reporting or clerical mistake has occurred or if intentional misrepresentation or fraudulent reporting has been done. Situations occur when an error in financial reporting is discovered In such a case, this error should be corrected, and one way of correction is to prepare financial restatement. Financial restatement is prepared in a Form 10-K/A filling – along with an audit opinion to the disclosure of restatement
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