Does order backlog matter for financial reporting quality? Evidence from revenue restatements

Abstract

In this study, we investigate the relationship between revenue recognition restatements and order backlog. Order backlog, a leading indicator of future earnings, is defined as the monetary value of unfilled orders at year-end. The presence of an order backlog can be economically significant and can have positive or negative implications. However, it is not clear whether there is an association between order backlog and financial reporting quality and, if there is, whether the relationship is negative or positive. Our results suggest that revenue recognition restatements are more likely to occur when order backlogs or changes in order backlogs are significant. Additionally, firms just meeting an earnings target when they have greater order backlog changes, and firms with a higher deferred-revenue-to-order-backlog ratio, are more likely to restate revenue. Finally, audit firms with more experience auditing companies with average backlogs above the median mitigate the association between backlogs and revenue restatements. Hence, financial statement users and auditors should use more skepticism in reviewing financial statements when firms have order backlogs.