Susan Scholz

The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence from Restatements

Our study examines the circumstances of non-GAAP financial reporting by 492 U.S. companies that announced restatements from 1995 to 1999. We analyze the occurrence and resolution of litigation over restatements; and, we explore the role of accounting items in bringing and resolving this litigation. To do so, we focus on the income statement. We provide evidence on the nature and pervasiveness of accounting misstatements and how, if at all, they affect litigation. We assess the nature of restatements by whether normal, recurring earnings from primary perations (core) or other components of earnings (non-core) are misstated and their pervasiveness by estimating the number of primary accounts misstated. In our sample, companies with core restatements have higher frequencies for intentional misstatements (fraud) and subsequent bankruptcy or delisting. They likewise have, on average, more material misstatements, more negative security price reactions to restatement announcements, and more negative security price changes over the six months preceding and following restatement announcements. However, controlling for these and other factors, we find a significant association between accounting items and litigation, whether occurrences or resolutions. Specifically, core restatements - driven primarily by revenue misstatements, a component of core earnings - and more pervasive restatements each play a role, while misstatements of non-core earnings alone do not.

Dissemination of information for investors at corporate Web sites

Abstract We extend the limited prior research on Internet financial reporting by providing insights into dissemination of two types of financial information at corporate Web sites. One type consists of reports that already have been filed with the SEC (i.e. required filings). The second type is all other (voluntary) information for investors. In doing so we investigate whether Web-based dissemination of both types of data can be explained by theories of incentives to voluntarily disclose information via more traditional means such as meetings or conference calls with analysts. We use regression analysis to test hypotheses that link the variation in the information disseminated through corporate Web sites to factors thought to influence voluntary disclosure of financial information. Presence of required items is significantly associated only with size and a proxy for information asymmetry, while voluntary information item disclosure is associated with variables proxying for size, information asymmetry, demand for external capital, and companies’ traditional disclosure reputations. Our results confirm that incentives motivating initial voluntary disclosure also explain the subsequent dissemination of voluntary material.

The presentation of financial information at corporate Web sites

Abstract The advent of the World Wide Web has provided a new avenue for companies to communicate with current and potential investors. Our study investigates corporate Web site financial disclosure practices. We evaluate and compare the Web site disclosure levels of 17 industries, and summarize the frequencies with which a variety of financial disclosure items are found. Our examination identifies several practices that raise potential concerns for the accounting profession. In particular, we investigate annual report excerpts tailored for Internet users and identify information found at Web sites that may increase disclosure risk. We also discuss issues associated with locating and using Web site data.

CEO Involvement in Selecting Board Members, Audit Committee Effectiveness, and Restatements

Research finds independent audit committees and audit committee financial experts are generally effective in monitoring the financial reporting and auditing processes. However, not all audit committees that appear in form to be independent are in fact actually independent, and not all financial experts with similar backgrounds and credentials are equally effective. CEO involvement in the board selection process can affect whether an audit committee substantively functions as an independent one. We use financial statement restatements to examine whether the benefits of having an independent and expert audit committee are diminished, or even eliminated, when the CEO is involved in the selection of board members. Our results provide some evidence that the monitoring benefits of having an independent and expert audit committee are only maintained when the CEO is not formally involved in selecting board members, although our proxy for CEO involvement in the director selection process is likely subject to some measurement error. Further, we find that these results appear to be driven by the more severe restatements, including misstatements in conjunction with fraudulent financial reporting. In addition, we find that our results continue to apply in the post-SOX period, a period where we have a more exact measure of CEO involvement in the director selection process. Finally, we find that the stock market’s negative reaction to a restatement is mitigated only when the audit committee is independent and the CEO was not involved in selecting board members.

Auditor Realignments Accompanying Implementation of SOX 404 ICFR Reporting Requirements

We examine the impact of adverse auditors’ opinions on clients’ internal control over financial reporting (ICFR), issued under SOX Section 404, on auditor dismissals. Companies receiving adverse ICFR opinions are more likely to subsequently dismiss their auditors. This association between adverse reports and dismissals persists over a four year period beginning with the initial year of SOX 404 reporting. Our evidence also suggests that these dismissals tend to be part of clients’ efforts to improve their overall financial reporting. Clients receiving adverse reports are more likely to switch to higher quality auditors, as proxied by Big 4 membership and two measures of industry specialization, than are clients receiving favorable reports. Further, adverse opinion clients that dismiss auditors and then hire new auditors that specialize in the client’s industry are more likely to receive an improved ICFR report in the next year.

Timely financial reporting at corporate web sites

Considering the competitive advantage of having current financial information available online, its curious how few institutions actually succeed in this regard.

A web site design model for financial information

SM 21.01 AMD 7.91 CFWY 3.34 ROST 30.09 VAR 63.49 RHI 18.72 LSI 11.39 RDRT 3.08 KL RCX 16.52 ATML 6.35 ADPT 7.90 CRUS 6.40 CDN 16.61 ADBE 24.23 CNO 6.41 IFMX 5.35 AL 15 ERTS 43.56 NETA 13.97 INTU 36.60 XLNX 23.35 CY 14.74 IDTI 18.56 NVLS 27.54 BELM 7.4 OL 15.40 SYMC 37.02 ACN 12.70 MXIM 35.00 WMAR 10.24 SANM 13.42 COHR 26.90 ASPT 1.69 LT 5.75 NWK 2.99 SILI 20.61 CPN 22.74 TRMB 14.08 CDCO 0.26 ESST 9.95 LSSI 0.14 ONCO 2. SPX 2.10 CWT 26.39 PLT 16.49 TRID 4.68 OAKT 7.62 STII 3.75 SPLI 17.10 ACTL 16.30 TB 2.319UTEK 11.53 AVNT 3.29 RATL 9.40 SYMM 4.65 DNEX 23.68 ENR 15.89 VVUS 2.92 ASYT 8. 18 IVAC 2.65 RMDY 29.40 SNDK 10.10 XICO 7.50 VRTS 19.70 SEBL 14.44 SJW 80.25 ISSI 6. CRL 18.82 STZ 41.11 APSG 8.65 NTAP 6.59 HAKI 4.79 THDO 2.12 EXAR 17.10 OWLD 0.016 IN 0.39 GGNS 1.93 RTEL 5.95 ASNT 0.21 ADTK 3.25 HWP 15.31 INTC 19.85 SUNW 8.16 AAPL 15 RCL 12.64 CNF 22.71 SLR 11.56 COMS 3.82 SGI 0.53 NSM 21.01 AMD 7.91 CFWY 3.34 RO HI 18.72 LSI 11.39 RDRT 3.08 KLAC 31.25 GVA 26.07 LRCX 16.52 ATML 6.35 ADPT 7.90 CR DBE 24.23 CNO 6.41 IFMX 5.35 ALTR 15.97 KMAG 0.15 ERTS 43.56 NETA 13.97 INTU 36.60 XL DTI 18.56 NVLS 27.54 BELM 7.41 SNPS 40.19 SOL 15.40 SYMC 37.02 ACN 12.70 MXIM 35.00 WM 3.42 COHR 26.90 ASPT 1.69 LTC 31.09 EFII 15.75 NWK 2.99 SILI 20.61 CPN 22.74 TRMB 14 SST 9.95 LSSI 0.14 ONCO 2.08 CMOS 11.15 ASPX 2.10 CWT 26.39 PLT 16.49 TRID 4.68 OA 75 SPLI 17.10 ACTL 16.30 TBP 4.06 EGLS 12.319UTEK 11.53 AVNT 3.29 RATL 9.40 SYMM 4. NR 15.89 VVUS 2.92 ASYT 8.44 CRV 0.54 NCDI 0.18 IVAC 2.65 RMDY 29.40 SNDK 10.10 XI 9.70 SEBL 14.44 SJW 80.25 ISSI 6.70 RSHX 0.45 MCRL 18.82 STZ 41.11 APSG 8.65 NTAP 6. HDO 2.12 EXAR 17.10 OWLD 0.016 INCY 13.58 SPCT 10.39 GGNS 1.93 RTEL 5.95 ASNT 0.21 AD NTC 19.85 SUNW 8.16 AAPL 15.73 CSCO 11.84 ORCL 12.64 CNF 22.71 SLR 11.56 COMS 3.82 SG MD 7.91 CFWY 3.34 ROST 30.09 VAR 63.49 RHI 18.72 LSI 11.39 RDRT 3.08 KLAC 31.25 GV 6.52 ATML 6.35 ADPT 7.90 CRUS 6.40 CDN 16.61 ADBE 24.23 CNO 6.41 IFMX 5.35 ALTR 15. RTS 43.56 NETA 13.97 INTU 36.60 XLNX 23.35 CY 14.74 IDTI 18.56 NVLS 27.54 BELM 7.41 SN YMC 37.02 ACN 12.70 MXIM 35.00 WMAR 10.24 SANM 13.42 COHR 26.90 ASPT 1.69 LTC 31.09 EF ILI 20.61 CPN 22.74 TRMB 14.08 CDCO 0.26 ESST 9.95 LSSI 0.14 ONCO 2.08 CMOS 11.15 AS LT 16.49 TRID 4.68 OAKT 7.62 STII 3.75 SPLI 17.10 ACTL 16.30 TBP 4.06 EGLS 12.319UT 29 RATL 9.40 SYMM 4.65 DNEX 23.68 ENR 15.89 VVUS 2.92 ASYT 8.44 CRV 0.54 NCDI 0. MDY 29.40 SNDK 10.10 XICO 7.50 VRTS 19.70 SEBL 14.44 SJW 80.25 ISSI 6.70 RSHX 0.45 MC PSG 8.65 NTAP 6.59 HAKI 4.79 THDO 2.12 EXAR 17.10 OWLD 0.016 INCY 13.58 SPCT 10.39 GG 95 ASNT 0.21 ADTK 3.25 HWP 15.31 INTC 19.85 SUNW 8.16 AAPL 15.73 CSCO 11.84 ORCL 12 LR 11.56 COMS 3.82 SGI 0.53 NSM 21.01 AMD 7.91 CFWY 3.34 ROST 30.09 VAR 63.49 RH DRT 3.08 KLAC 31.25 GVA 26.07 LRCX 16.52 ATML 6.35 ADPT 7.90 CRUS 6.40 CDN 16.61 AD FMX 5.35 ALTR 15.97 KMAG 0.15 ERTS 43.56 NETA 13.97 INTU 36.60 XLNX 23.35 CY 14.74 ID 7.54 BELM 7.41 SNPS 40.19 SOL 15.40 SYMC 37.02 ACN 12.70 MXIM 35.00 WMAR 10.24 SANM 13 SPT 1.69 LTC 31.09 EFII 15.75 NWK 2.99 SILI 20.61 CPN 22.74 TRMB 14.08 CDCO 0.26 ES 14 ONCO 2.08 CMOS 11.15 ASPX 2.10 CWT 26.39 PLT 16.49 TRID 4.68 OAKT 7.62 STII 3. CTL 16.30 TBP 4.06 EGLS 12.319UTEK 11.53 AVNT 3.29 RATL 9.40 SYMM 4.65 DNEX 23.68 EN 92 ASYT 8.44 CRV 0.54 NCDI 0.18 IVAC 2.65 RMDY 29.40 SNDK 10.10 XICO 7.50 VRTS 19 JW 80.25 ISSI 6.70 RSHX 0.45 MCRL 18.82 STZ 41.11 APSG 8.65 NTAP 6.59 HAKI 4.79 TH 7.10 OWLD 0.016 INCY 13.58 SPCT 10.39 GGNS 1.93 RTEL 5.95 ASNT 0.21 ADTK 3.25 HWP 15. UNW 8.16 AAPL 15.73 CSCO 11.84 ORCL 12.64 CNF 22.71 SLR 11.56 COMS 3.82 SGI 0.53 NS 7.91 CFWY 3.34 ROST 30.09 VAR 63.49 RH 11.39 RDRT 3.08 KLAC 31.25 GVA 26. 16.52 ATML 6.35 ADPT 7.90 CRUS 6. 16.61 ADBE 24.23 CNO 6.41 IFMX 5.3 15.97 KMAG 0.15 ERTS 43.56 NETA 13 36.60 XLNX 23.35 CY 14.74 IDTI 18.56 NV 41 SNPS 40.19 SOL 15.40 SYMC 37.02 ACN 12.70 MXIM 35.00 WMAR 10.24 SANM 13.42 COHR 26 TC 31.09 EFII 15.75 NWK 2.99 SILI 20.61 CPN 22.74 TRMB 14.08 CDCO 0.26 ESST 9.95 LS 08 CMOS 11.15 ASPX 2.10 CWT 26.39 PLT 16.49 TRID 4.68 OAKT 7.62 STII 3.75 SPLI 17 BP 4.06 EGLS 12.319UTEK 11.53 AVNT 3.29 RATL 9.40 SYMM 4.65 DNEX 23.68 ENR 15.89 VV 44 CRV 0.54 NCDI 0.18 IVAC 2.65 RMDY 29.40 SNDK 10.10 XICO 7.50 VRTS 19.70 SEBL 14 SSI 6.70 RSHX 0.45 MCRL 18.82 STZ 41.11 APSG 8.65 NTAP 6.59 HAKI 4.79 THDO 2.12 EX 016 INCY 13.58 SPCT 10.39 GGNS 1.93 RTEL 5.95 ASNT 0.21 ADTK 3.25 HWP 15.31 INTC 19 APL 15.73 CSCO 11.84 ORCL 12.64 CNF 22.71 SLR 11.56 COMS 3.82 SGI 0.53 NSM 21.01 AM 34 ROST 30.09 VAR 63.49 RHI 18.72 LSI 11.39 RDRT 3.08 KLAC 31.25 GVA 26.07 LRCX 16 DPT 7.90 CRUS 6.40 CDN 16.61 ADBE 24.23 CNO 6.41 IFMX 5.35 ALTR 15.97 KMAG 0.15 ER 3.97 INTU 36.60 XLNX 23.35 CY 14.74 IDTI 18.56 NVLS 27.54 BELM 7.41 SNPS 40.19 SOL 15. CN 12.70 MXIM 35.00 WMAR 10.24 SANM 13.42 COHR 26.90 ASPT 1.69 LTC 31.09 EFII 15.75 NW 0.61 CPN 22.74 TRMB 14.08 CDCO 0.26 ESST 9.95 LSSI 0.14 ONCO 2.08 CMOS 11.15 ASPX 2. LT 16.49 TRID 4.68 OAKT 7.62 STII 3.75 SPLI 17.10 ACTL 16.30 TBP 4.06 EGLS 12.319UT 29 RATL 9.40 SYMM 4.65 DNEX 23.68 ENR 15.89 VVUS 2.92 ASYT 8.44 CRV 0.54 NCDI 0. MDY 29 40 SNDK 10 10 XICO 7 50 VRTS 19 70 SEBL 14 44 SJW 80 25 ISSI 6 70 RSHX 0 45 MC COMMUNICATIONS OF THE ACM November 2001/Vol. 44, No. 11 51 mation about their financial performance. In effect, they are using Internet technology to market their company to investors. Our study of the financial content of 203 Web sites found evidence that detailed, objective financial data is associated with companies that have more sophisticated financial consumers. On the other hand, less extensive, more subjective financial data is associated with less sophisticated consumers. This pattern is consistent with theories developed to explain product marketing. Maheswaran and Sternthal [5] summarize marketing literature that predicts which types of information are most likely to persuade different groups of information users. Consumers that have substantial knowledge of a product genre tend to respond best to objective information about product attributes. For example, Maheswaran and Sternthal found that computer experts were more motivated to process information and make product judgments when presented with attribute information such as “It has a large memory capacity expandable to 512K by bank switching” [5]. In contrast, novice computer users were drawn to more subjective, less extensive information about product benefits: “It has a large memory capacity adequate to handle heavy duty word processing better than the existing word processors” [5]. Research provides empirical evidence supporting the relation between subject expertise (high versus low) and effective routes to persuasion (attribute versus benefit information) [3, 5, 9]. In the context of financial information, literature from the National Investor Relations Institute (NIRI) suggests that investor relations officers explicitly view their activities as a means of marketing their firms’ securities by disseminating financial information [6]. Furthermore, successful marketing involves identifying and satisfying the needs and desires of specific information consumers. While it is true that Web sites may not be constructed primarily to post financial data, their use for communicating with investors is growing throughout the world. A 1998 survey of investor relations (IR) officers [8] found that launching a Web site was the top priority innovation planned for 1999 for those located in the U.K. and Asia. It was the second priority for those located in ContiA Web Site Design Model for Financial Information Michael Ettredge, Vernon J. Richardson, and Susan Scholz

Short Selling Around Restatement Announcements When Do Bears Pounce

This paper draws on two distinct literatures – one that investigates the impact of accounting restatements and another that investigates the trading behavior of short sellers – to further our understanding of how sophisticated investors process and respond to news about accounting corrections. We examine short-seller behavior in the days surrounding restatement announcements to determine when short sellers identify restatements and how they trade on restatement news. Our findings suggest that short sellers do not appear to anticipate restatement announcement dates, but we find that abnormal short selling is significantly higher than is typical when restatements are announced, especially for restatements announced transparently (i.e., in press releases or 8-Ks). Short sellers target small companies, whose information environments may be weaker, and companies making restatements that reduce previously reported income. In addition, we find that restating companies targeted most heavily by short sellers experience the most negative subsequent abnormal returns over horizons of up to 40 trading days following the restatement disclosure. Overall, our results suggest that short sellers respond to, but do not anticipate, restatement announcements and trade as if they understand the post-announcement stock price implications of restatement disclosures.

Determinants of voluntary dissemination of financial data at corporate Web sites

We hypothesize that this variation in the extent and nature of financial data disseminated through corporate Web sites is associated with the factors that influence the initial disclosure of financial information. We consider information items that contain required disclosures separately from those that contain mainly voluntary disclosures, since most previous work that identifies factors affecting financial disclosures have focused on discretionary information. To test our hypotheses, we employ a sample of companies rated by the AIMR. We use the AIMRs disclosure quality rating as an independent variable to investigate whether companies have disclosure profiles that carry over to their Web dissemination practices. Our results confirm that they do, although mainly with respect to the presentation of voluntarily produced financial data. Consistent with extant literature on voluntary disclosure, our evidence suggests that firms develop a Web-based dissemination policy based on their size, need to access the capital markets, need to reduce information asymmetry, and their non-Web-based disclosure personality. Of particular interest, these results indicate that some of the incentives thought to motivate initial voluntary disclosure also explain subsequent voluntary dissemination.

Short Selling Around Restatement Announcements

This article draws on two distinct literatures—one that investigates the impact of accounting restatements and another that investigates the trading behavior of short sellers—to further our understanding of how sophisticated investors process and respond to news about accounting corrections. We examine short-seller behavior in the days surrounding restatement announcements to determine when short sellers identify restatements and how they trade on restatement news. Our findings suggest that short sellers do not appear to anticipate restatement announcement dates, but we find that abnormal short selling is significantly higher than is typical when restatements are announced, especially for restatements announced transparently (i.e., in press releases or 8-Ks). Short sellers target small companies, whose information environments may be weaker, and companies making restatements that reduce previously reported income. In addition, we find that restating companies targeted most heavily by short sellers experience the most negative subsequent abnormal returns over horizons of up to 40 trading days following the restatement disclosure. Overall, our results suggest that short sellers respond to, but do not anticipate, restatement announcements and trade as if they understand the post-announcement stock price implications of restatement disclosures.