Characteristics of U.S. Companies that Adopted SAB 108 and Corrected Prior Period Misstatements: An Empirical Analysis

• In Event: Emerging and Innovative Research Session II

Abstract

Prior period misstatements can come from multiple sources including arithmetic errors, GAAP errors, improper revenue recognition, aggressive liability estimates, understating expenses, and others. After SAB 108 went into effect in late 2006, US companies have to use the dual approach – the “rollover” and the “iron curtain” approaches and correct the cumulative errors in both the income statement and the balance sheet. The purpose of this paper is to analyze the financial characteristics of companies that adopted SAB 108 and corrected prior period errors. The univariate test (t-test for mean differences) indicates that the SAB 108 firms are significantly smaller, have lower returns on equity, and lower gross margins when compared to a set of control firms matched by industry. The t-test results also indicate that the mean total asset turnover ratio and the mean inventory ratio are significantly higher for the SAB 108 firms when compared to the control firms. SAB 108 error corrections are more often found in business services industry. While 33 percent of the control firms received clean audit opinions, only 17.6 percent of the SAB 108 adopters received clean audit opinions and the difference is statistically significant. The logistic regression (a multivariate test) results indicate that the total assets turnover ratios and size measures are significantly different between the SAB 108 firms and control firms. Investors, government regulators, external auditors, and financial analysts could be interested in the results of this study.

Author

• Srinivasan Ragothaman, The University of South Dakota