Abstract
A financial report restatement reflects errors in the previous financial statement, and thus it increases investors’ doubt about the credibility of the financial statement. The primary objective of this paper is to examine whether restatement announcements imply increased fraud risks in Chinese firms in the context that up to one quarter of listed companies have restated their financial reports in China, and explore the implications of the content, severity and reasons for restatements with respect to fraud. In this paper, firms with financial restatements prove to be more likely to be labeled as fraudulent by regulators in China. Second, the following results also are revealed: (1) financial statements, except balance sheet restatements, provide insights into the revelation of fraudulent behaviors, (2) the severity of restatements is positively correlated with future fraud disclosures, and (3) restatements due to negligence are positively correlated with future fraud occurrences. These results imply that restatement announcements and their different characteristics provide important information for detecting financial statement fraud.
Highlights
According to the report of Association of Certified Fraud Examiners (2016), the total losses for all fraud cases exceeded $6.3 billion, with 23.2% of cases causing losses of $1 million or more
Our evidence supports Hypothesis 2c, implying that restatements related to footnotes provide information on detecting fraud. These results suggest that the content of restatements affect future fraud revelations
This study reveals a significant relationship between financial report restatements and future fraud revelations
Summary
According to the report of Association of Certified Fraud Examiners (2016), the total losses for all fraud cases exceeded $6.3 billion, with 23.2% of cases causing losses of $1 million or more. Journal of Business Economics and Management, 2019, 20(6): 1210–1237 analyzing the content of corporate 8-K restatement reports All of these studies are devoted to the problem that which kinds of restatements could be ascribed to fraud. Prior studies tend to focus on identifying the fraud in restatements under the proposition that the restatements use variants of the words “fraud” or “irregularity” (Hennes et al, 2008). Hennes et al (2008) have classified restatements into errors and irregularities (fraud) according to managerial intent In contrast to those studies, this paper seeks to better understand the characteristics of restatements in order to provide details for proving fraud intent. Our studies focus investors’ attention on the implications of restatements and their benefits by identifying which restatement contents can predict fraud.
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