by Cydney Posner
No, it’s not from The Onion. According to a study reported in CFO.com, unless the restating company faces regulatory action or shareholder litigation, the company’s competitors may use its financial restatement as a how-to guide. The study found that, instead of driving peer companies to examine their own financial reporting to see if they need to correct for or prevent the same type of error, the restatement prompts peer companies to imitate the misreporting. The study, which covered the period 1997 through 2008, was conducted by researchers from Rutgers University, Nanyang Business School in Singapore and Columbia University.
In one example cited in the article, a healthcare provider restated its earnings to correct for earnings management that had occurred over a five-year period: “Within two and a half months of the restatement, three firms in the same industry began to manage earnings, according to their own subsequent restatements. ‘A pattern we saw frequently was for peer firms to follow the lead of announcement companies in what they misreported and how they misreported it….In a sense, restatements serve as handbooks of trickery’” according to a co-author of the study. Moreover, the co-author rebuffed the idea that it was all just a coincidence: “’where just a few firms are involved, the link may be coincidental. But for our sample as a whole, consisting of thousands of firms, the chance that the public contagion we have documented was just a coincidence is extremely slim.’”
However, the prospect of punishment – whether through shareholder litigation or SEC enforcement – appeared to have a deterrent effect, according to the study. In addition, no earnings management contagion was in evidence during the three years after the passage of SOX. Apparently, however, the prospect of eventually undergoing a painful restatement had no effect as a deterrent.