Accounting Irregularities, Management Compensation Structure and Information Asymmetry

Abstract

The discovery of accounting irregularities is an important negative event for a company. The restatement resulting from the irregularity represents an average of 364 per cent of net income for the 152-firm sample and the irregularities are predominantly revenue enhancing. The irregularity firms exhibit both lower transparency and visibility compared to a matched sample of non-irregularity firms. Furthermore, prior to the announcement, these firms experienced poorer operating performance and their executive compensation structure is found to be significantly more equity-based. Therefore, firms that have greater opportunity and incentive are shown to be more likely to commit accounting irregularities.