Accounting Restatements and the Timeliness of Disclosures

Regulators are concerned that during the process of preparing accounting restatements firms fail to provide timely progress updates, and delay earnings announcements and regulatory filings. Regulators are considering ways to reduce lags in disclosure following restatements, including controversial proposals to alter materiality guidance so that fewer accounting errors require restatements. We examine the length, causes, and effects of disclosure lags around restatements, finding that lengthy lags are uncommon and concentrated in restatements involving suspected or confirmed fraud. Disclosure lags rarely result in stock delistings or debt covenant violations, but do appear to decrease market values and in some circumstances decrease stock liquidity. Although these negative capital market consequences are cause for concern, regulatory reforms are not likely to shorten disclosure lags substantially because lengthy lags are uncommon and appear to be largely unavoidable consequences of fraud investigations and other inherent constraints.