Consequences of restatements caused by fraudulent accounting for accounting discretionary behavior

Abstract

　This study examines the change in the accounting discretionary behavior after the restatement caused by fraudulent accounting in Japan. I analyzed the difference-in-differences in the abnormal accruals, which presents the accounting discretionary behavior, for firms that restated due to fraud and non-fraud firms. As a result, I find that firms restated due to fraudulent accounting experience the significant income-decrease difference of abnormal accruals in the initial reports’ announcement period and the following periods. The results mean that the disclosure of fraudulent accounting, which has a material misstatement, is a turning point for firms to settle their past accounting discretionary behavior and reduce income-increase accounting discretionary behavior after that. It suggests that firms take actions to signal improvement of financial reporting quality, restoring their trust after the restatement of fraudulent accounting.