The Effect of SEC Revenue Related AAERs on Peer Firm Financial Reporting Behavior

• In Event: Financial Accounting and Reporting 1

Abstract

This paper examines whether revenue related SEC Accounting and Auditing Enforcement Releases (AAERs) serve as a deterrent against aggressive reporting among industry peers. I provide evidence that after a revenue related AAER is issued in the industry, peer firms report lower revenue accruals, consistent with aggressive revenue practices becoming more costly post AAER. I find that this behavior is sustained for at least three years after the AAER is issued. This result appears to be stronger for firms in industries where only a single revenue related AAER was issued during the event year rather than multiple AAERs, as firms in the multiple AAER sample appear to be slower to decrease revenue accruals in the post AAER period. Even though the cost of aggressive revenue reporting may increase, the benefits of misreporting might still be great enough that some firms may shift to alternative less costly methods to reap these benefits, such as reducing current expense accruals or decreasing research and development expenses (method shifting). While no evidence is found to support method-shifting in the single AAER sample, evidence is found that firms in the multiple AAER sample reduce research and development expenses on a consistent basis in the post AAER period, which is consistent with method-shifting behavior.

Author

• Kristy Schenck, Bucknell University