Characteristics of Accounting Standards and SEC Review Comments

Abstract

SYNOPSIS As mandated by Sarbanes-Oxley, the SEC reviews the financial reports of public companies and challenges the appropriateness of accounting that seems questionable or unclear. We investigate whether the likelihood of an SEC comment (challenge), and the time needed to resolve such comments, depends upon either of two characteristics of the underlying accounting standard—rules and accounting estimates. We find that the probability of an SEC comment increases with the rules-based characteristics in the standard, but find little evidence that time to resolution is related to such characteristics. We also find that the extent of estimates required to implement the standard is positively associated with both the probability of an SEC comment and the time to resolve the comment. Our findings should help inform the debate over the appropriate level of rules and estimates in GAAP, and are especially timely in light of the potential convergence between more rules-based U.S. GAAP and more principles-based IFRS GAAP. Data Availability: Data are available from public sources.

Information Environment Consequences of SEC Non-GAAP Comment Letters

“…They also find that the probability that the comment letter process ends in restatements is higher for smaller firms. Evidence in Boone, Linthicum, and Poe (2013) suggests that the probability of receiving an SEC comment increases with the rules-based characteristics in an accounting standard, and that standards requiring more extensive estimates generate more comment letters and longer resolution times.…”

Securities Law Expertise and Corporate Disclosure

“…10 While a few studies consider general legal expertise among the board of directors, most studies examine general 8 See, for example , Helper 1991;Loh and Venkatraman 1992;Higgins and Rodriguez 2006;Abbott et al 2007;Caruth et al 2013. 9 This literature focuses on the determinants and consequences of specific types of comment letters (e.g., Robinson et al 2011;Ertimur and Nondorf 2006;Ettredge et al 2011;Dechow et al 2016;Cunningham et al 2016), understanding how the SEC monitors disclosure (e.g., Boone et al 2013;Cassell et al 2013;Gao et al 2010), and more recently on the benefits comment letters provide to the users of companies' financial disclosures (e.g., Bozanic et al 2015;Brown et al 2015;Johnston and Petacchi 2015). 10 For example, prior research investigates how financial expertise among the independent audit committee members (e.g., Farber 2005;Dhaliwal et al 2010;Bryan et al 2013), external auditor expertise (e.g., Reichelt and Wang 2010;Gul et al 2009;Minutti-Meza 2014), or outsourced internal audit expertise (e.g., Abbott et al 2007) affect financial reporting quality.…”

The Causes and Economic Consequences of Patent Litigation

“…We also include year fixed effects in research models and adopt clustering by companies plus White's heteroskedasticity-adjusted standard errors (Petersen, 2009;Gow et al, 2010;Boone et al, 2013).…”