Earnings Restatements and Characteristics of Corporate Executives : Evidence from Japan

In Japan, financial statements are disclosed under the timely disclosure regulations of securities exchanges before the completion of an external audit and disclosed again after the completion of an external audit under the Financial Instruments and Exchange Act. In each case, any errors contained in financial statements have to be corrected. This study investigated how the characteristics of corporate executives might affect the occurrence probability of earnings restatements. I found that the appointment of a CFO who is a certified public accountant or the presence of a former accounting chief of the company concerned (or another company) among the auditors reduce the occurrence probability of earnings restatements occurring before (or after) the completion of an audit as a result of unintentional errors. In contrast, if the auditors include a certified tax accountant with experience in tax collection, the probability of earnings restatements increases regardless of whether an audit has been completed. This suggests that strong tax saving incentives on the side of companies affect financial reporting given that book-tax conformity is high in Japan