An Examination of the Recently Restated Financial Statements Due to Inappropriate Lease Accounting. by Academy of Accounting and Financial Studies Journal

An Examination of the Recently Restated Financial Statements Due to Inappropriate Lease Accounting.

By Academy of Accounting and Financial Studies Journal

  • Release Date: 2007-09-01
  • Category: Business & Personal Finance

Brief Description

ABSTRACT The purpose of this paper is to describe the history surrounding the recent spike in financial statement restatements related to firms' accounting for leases. The restatements were largely caused by a letter from the SEC emphasizing the rules regarding appropriate accounting for leases. This paper explains why the large number of restatements caused by the SEC letter was such a surprise and discusses the accounting issues raised by the SEC letter. Prior research has found that restatements are more likely in areas where GAAP is contradictory or unclear. GAAP for leases is well established and fairly clear. Also, prior research has found that restatements are more likely due to inappropriate accounting for items that are not part of a company's core earnings. However, in this case the lease accounting that led to the restatements was part of the companies' core earnings. Finally, the paper provides some analysis regarding the commitment to quality financial reporting practices by the companies that restated their financial statements due to inappropriate lease accounting. This analysis indicates that companies that restated did not show lower levels of commitment to quality financial reporting than did firms that did not restate. This evidence is consistent with the conjecture made by many of the companies that restated that they thought their method of accounting for leases was acceptable.

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