Zoe-Vonna Palmrose

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.

The Effect Of Nonaudit Services On The Pricing Of Audit Services - Further Evidence

An improved catalyst composition for carbonylating olefinically unsaturated hydrocarbons with carbon monoxide and a hydroxylic compound comprises a zero-valent palladium or platinum complex incorporating stabilizing phosphine ligands, and excess ligand. Use of these catalyst compositions results in a high ratio of straight-chain to branch-chain product when employed in the carbonylation of alpha olefins to produce carboxylic acids, esters or acid anhydrides.

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.

Audit litigation research: Do the merits matter? An assessment and directions for future research

Abstract This article reviews audit litigation research and discusses suggestions for future research. Recent reforms in federal and state laws related to accounting and auditing services increase the opportunities for research. An overarching issue in the public policy debate over legal reforms is the role of merits in bringing and resolving lawsuits against auditors; this issue frames the discussion of audit litigation research.