The Influence of Materiality and Voluntary Incentives on Companies’ Decisions to Announce Accounting Restatements Through 8-K And/Or Amended Filings

Abstract

Many companies fail to announce restatements in 8-K reports and/or in amended financial statement filings (10-K/As). This lack of disclosure leads some to question whether companies are intentionally attempting to hide restatements from shareholders or whether, given the conservative nature of auditors and regulators, the lack of disclosure is due to the immaterial nature of some restatements. This study examines the relative importance of quantitative and qualitative materiality factors and voluntary incentive factors in explaining companies’ decisions to file 8-K and/or amended reports for restatements. We find that the decision to file an 8-K report is primarily driven by materiality factors, although voluntary incentives provide incremental explanatory power even after controlling for the materiality of the restatement. In addition, in 2004 the SEC clarified that restatements are required to be announced via 8-K reports. Our findings suggest that this rule change appears to have decreased the importance of voluntary incentive factors in the 8-K filing decision. In contrast, we document that materiality factors explain much less and voluntary incentives explain much more of the amended filing decision than the 8-K decision. After the SEC’s 8-K rule change, we find a decrease in the importance of both the materiality and voluntary incentive factors in the amended report decision and a decrease in amended filings. This might suggest that the SEC’s clarification of the requirements for filing 8-K reports left companies unclear as to the requirements for filing amended reports.