Does the Form 20‐F reconciliation help ensure the financial reporting quality of cross‐listed IFRS firms? A comparison with cross‐listed non‐IFRS firms

Abstract

This paper investigates whether financial reporting quality improves or deteriorates after the US Securities and Exchange Commission (SEC) decided to eliminate the Form 20‐F reconciliation requirement for foreign cross‐listed firms following International Financial Reporting Standards (IFRS). Using a difference‐in‐differences research design, we find that cross‐listed IFRS firms are less likely to restate financial statements after the SEC revoked their reconciliation requirement, as compared to cross‐listed non‐IFRS firms that still need to prepare the reconciliation. Moreover, such a reduction in the occurrence of financial restatements is more prominent when cross‐listed IFRS firms engage global industry‐specialist auditors and originate from common law countries. Together, this paper lends support to the elimination of the reconciliation requirement for cross‐listed IFRS firms and highlights the important roles of auditors and the legal environment in shaping financial reporting quality.