Accounting complexity, misreporting, and the consequences of misreporting
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I examine whether accounting complexity in the area of revenue recognition increases the probability of restating reported revenue. I measure revenue recognition complexity using the number of words and recognition methods from the revenue recognition disclosure in the 10-K and a factor score based on the number of words and methods. Tests reveal that revenue recognition complexity increases the probability of revenue restatements, and these restatements are the result of both intentional and unintentional misreporting. Furthermore, complexity moderates the consequences of restatement—lower incidence of AAERs, less negative restatement announcement returns, and lower subsequent CEO turnover—suggesting that stakeholders of the firm consider accounting complexity when responding to misreporting.
KeywordsMisreporting Restatement Revenue recognition Accounting complexity Restatement consequences
JEL ClassificationG38 M41
This paper is based on my dissertation at the University of Michigan. I appreciate the guidance and advice of my dissertation committee members, Russell Lundholm and Ilia Dichev, and especially my chair, Michelle Hanlon. Author also thankful to the following for helpful comments: David Guenther, Angela Davis, Judson Caskey, Lian Fen Lee, K. Ramesh, Jeff Wilks, Cathy Shakespeare, Chad Larson, Peter Demerjian, anonymous reviewers, and workshop participants at the University of Michigan, Washington University (St. Louis), University of Oregon, and Northwestern University.
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