TAILIEUCHUNG - CORPORATE GOVERNANCE AND ACCOUNTING SCANDALS*

This paper empirically examines whether certain corporate governance mechanisms are related to the probability of a company restating its earnings. We examine a sample of 159 . public companies that restated earnings and an industry-size matched sample of control firms. We have assembled a novel, hand-collected data set that measures the corporate governance characteristics of these 318 firms. We find that several key governance characteristics are unrelated to the probability of a company restating earnings. These include the independence of boards and audit committees and the provision of nonaudit services by outside auditors. We find that the probability of restatement is lower in companies whose boards or audit. | CORPORATE GOVERNANCE AND ACCOUNTING SCANDALS ANUPAGRAWAL University of Alabama and SAHIBA AAADAA HSBC New York Abstract This paper empirically examines whether certain corporate governance mechanisms are related to the probability of a company restating its earnings. We examine a sample of 159 . public companies that restated earnings and an industry-size matched sample of control firms. We have assembled a novel hand-collected data set that measures the corporate governance characteristics of these 318 firms. We find that several key governance characteristics are unrelated to the probability of a company restating earnings. These include the independence of boards and audit committees and the provision of nonaudit services by outside auditors. We find that the probability of restatement is lower in companies whose boards or audit committees have an independent director with financial expertise it is higher in companies in which the chief executive officer belongs to the founding family. These relations are statistically significant large in magnitude and robust to alternative specifications. Our findings are consistent with the idea that independent directors with financial expertise are valuable in providing oversight of a firm s financial reporting practices. I. Introduction Recent accounting scandals at prominent companies such as Enron HealthSouth Tyco and Worldcom appear to have shaken the confidence of investors. In the wake of these scandals many of these companies saw their equity values plummet dramatically and experienced a decline in the credit ratings of their debt issues often to junk status. Many of these firms were For helpful comments we thank George Benston Matt Billett Richard Boylan Mark Chen Jeff England Jeff Jaffe Chuck Knoeber Sudha Krishnaswami Scott Lee Florencio Lopez-de-Silanes Luann Lynch N. R. Prabhala Yiming Qian David Reeb Roberta Romano P. K. Sen Mary Stone Per Stromberg and Anand Vijh seminar participants at New York University

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