Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

ABSTRACT: We study the frequency of restatements by foreign firms listed on U.S. exchanges. We find that the restatement rate of U.S.-listed foreign firms is significantly lower than that of comparable U.S. firms and that the difference depends on the firm's home country characteristics. Foreign firms from countries with a weak rule of law are less likely to restate than are firms from strong rule of law countries. While the lower rate of restatements can represent an absence of errors, it can also indicate a lack of detection and disclosure of errors and irregularities. We infer the effect of detection and disclosure by associating the frequency of restatements with the quality of the firm's internal control system. We find that only U.S. firms and foreign firms from strong rule of law countries show a positive association between restatement frequency and internal control weaknesses. Firms from weak rule of law countries show no significant association. We interpret these findings as home country enforc...