Do Type II Subsequent Events Impair Financial Reporting Quality?
Czerney, Keith, Schmidt, Jaime J., Thompson, Anne M., Zhu, Wei
The Accounting Review · 2020 · Volume 95 · Issue 6
Abstract
This study examines whether material corporate events that occur during the year-end closing process constrain management's and the auditor's resources and inhibit them from providing high-quality financial reports. For a sample of U.S. company financial reports issued during 2000–2013, we identify material corporate events using Type II subsequent event footnote disclosures (i.e., material events that occur in yeart+1, but prior to the issuance of the yeartfinancial statements, yet do not affect amounts recognized in yeart). We find that Type II subsequent events are associated with lower financial reporting quality, as measured by the need to subsequently restate the yeartfinancial statements. The increased restatement likelihood only occurs when managers are resource-constrained. Auditors can mitigate the increased restatement risk, but only when they allocate more resources to the engagement. Our results underscore the importance of resource management in the financial reporting and audit processes.
Keywords
disclosure, financial reporting quality, resource constraints, restatements, subsequent events
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