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The Reputational Penalty for Aggressive Accounting: Earnings Restatements and Management Turnover

The Accounting review, 2006-01, Vol.81 (1), p.83-112 [Peer Reviewed Journal]

Copyright 2006 American Accounting Association ;Copyright American Accounting Association Jan 2006 ;ISSN: 0001-4826 ;EISSN: 1558-7967 ;DOI: 10.2308/accr.2006.81.1.83 ;CODEN: ACRVAS

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Title:
The Reputational Penalty for Aggressive Accounting: Earnings Restatements and Management Turnover
Author: Desai, Hemang ; Hogan, Chris E. ; Wilkins, Michael S.
Subjects: Accounting methods ; Accounting policies ; Business accounting ; Business management ; Business structures ; Chief executive officers ; Corporate governance ; Empirical tests ; Employment ; Executives ; Financial management ; Financial reporting ; Fines & penalties ; Generally accepted accounting principles ; Income statements ; Labour turnover ; Legal aspects ; Managers ; P values ; Public image management ; Rehiring ; Studies ; Turnaround management
Is Part Of: The Accounting review, 2006-01, Vol.81 (1), p.83-112
Description: In this paper we investigate the reputational penalties to managers of firms announcing earnings restatements. More specifically, we examine management turn-over and the subsequent employment of displaced managers at firms announcing earnings restatements during 1997 or 1998. In contrast to prior research (Beneish 1999; Agrawal et al. 1999), which does not find increased turnover following GAAP violations or revelation of corporate fraud, we find that 60 percent of restating firms experience a turnover of at least one top manager within 24 months of the restatement compared to 35 percent among age-, size-, and industry-matched firms. Moreover, the subsequent employment prospects of the displaced managers of restatement firms are poorer than those of the displaced managers of control firms. Our results hold after controlling for firm performance, bankruptcy, and other determinants of management turnover, and suggest that both corporate boards and the external labor market impose significant penalties on managers for violating GAAP. Also, in light of resource constraints at the SEC, our findings are encouraging as they suggest that private penalties for GAAP violations are severe and may serve as partial substitutes for public enforcement of GAAP violations.
Publisher: Sarasota: American Accounting Association
Language: English
Identifier: ISSN: 0001-4826
EISSN: 1558-7967
DOI: 10.2308/accr.2006.81.1.83
CODEN: ACRVAS
Source: AUTh Library subscriptions: ProQuest Central

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The Reputational Penalty for Aggressive Accounting: Earnings Restatements and Management Turnover

Copyright 2006 American Accounting Association ;Copyright American Accounting Association Jan 2006 ;ISSN: 0001-4826 ;EISSN: 1558-7967 ;DOI: 10.2308/accr.2006.81.1.83 ;CODEN: ACRVAS

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