The value of restatement to fraud prediction

    Shi Qiu   Affiliation
    ; Hong-Qu He Affiliation
    ; Yuan-sheng Luo Affiliation


A financial report restatement reflects errors in the previous financial statement, and thus it increases investors’ doubt about the credibility of the financial statement. The primary objective of this paper is to examine whether restatement announcements imply increased fraud risks in Chinese firms in the context that up to one quarter of listed companies have restated their financial reports in China, and explore the implications of the content, severity and reasons for restatements with respect to fraud. In this paper, firms with financial restatements prove to be more likely to be labeled as fraudulent by regulators in China. Second, the following results also are revealed: (1) financial statements, except balance sheet restatements, provide insights into the revelation of fraudulent behaviors, (2) the severity of restatements is positively correlated with future fraud disclosures, and (3) restatements due to negligence are positively correlated with future fraud occurrences. These results imply that restatement announcements and their different characteristics provide important information for detecting financial statement fraud.

Keyword : restatement, fraud, innocent error, negligence, severity of restatement, content of restatement, reasons of restatements, propensity score matching method, fraud risk

How to Cite
Qiu, S., He, H.-Q., & Luo, Y.- sheng. (2019). The value of restatement to fraud prediction. Journal of Business Economics and Management, 20(6), 1210-1237.
Published in Issue
Oct 14, 2019
Abstract Views
PDF Downloads
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.


ACFE. (2016). ACFE report to the nations on occupational fraud and abuse. Technical Report, Association of Certified Fraud Examiners, Austin, TX. Retrieved from

Ahmed, K., & Goodwin, J. (2007). An empirical investigation of earnings restatements by Australian firms. Accounting and Finance, 47(1), 1-22.

Badertscher, B. A., & Burks, J. J. (2011). Accounting restatements and the timeliness of disclosures. Accounting Horizons, 25(4), 609-629.

Bartus, T. (2005). Estimation of marginal effects using margeff. Stata Journal, 5(3), 309-329.

Baucus, M. (1994). Pressure, opportunity and predisposition: A multivariate model of corporate illegality. Journal of Management, 20(4), 699-721.

BenYoussef, N., & Breton, G. (2016). Restatement announcements: sincerity analysis through information manipulation theory. Retrieved from

BenYoussef, N., & Khan, S. (2018). Timing of earnings restatements: CEO equity compensation and market reaction. Accounting and Finance, 58(2), 341-365.

China securities regulatory commission. (2012). Guidelines for the industry classification of listed companies. Retrieved from

Christensen, J. (2010). Accounting errors and errors of accounting. Accounting Review, 85(6), 1827-1838.

Chung, J., & Mccracken, S. (2014). Understanding the restatement process. Accounting Perspectives, 13(4), 253-281.

Corona, C., & Randhawa, R. S. (2018). The value of confession: admitting mistakes to build reputation. The Accounting Review, 93(3), 133-161.

Cuadrado-Ballesteros, B., Garcia-Sanchez, I. M., & Ferrero, J. M. (2016). How are corporate disclosures related to the cost of capital? The fundamental role of information asymmetry. Management Decision, 54(7), 1669-1701.

Demirkan, S., & Platt, H. D. (2018). Differential investors’ response to restatement announcements: an empirical investigation. Journal of Economics and Financial Analysis, 2(2), 29-59.

Donelson, D. C., Ege, M. S., & McInnis, J. M. (2017). Internal control weaknesses and financial reporting fraud. Auditing: A Journal of Practice & Theory, 36(3), 45-69.

Dorminey, J., Fleming, A. S., Kranacher, M. J., & Riley Jr, R. A. (2012). The evolution of fraud theory. Issues in Accounting Education, 27(2), 555-579.

Erickson, M., Hanlon, M., & Maydew, E. L. (2006). Is there a link between executive equity incentives and accounting fraud? Journal of Accounting Research, 44(1), 113-143.

Fang, J., Lobo, G. J., Zhang, Y., & Zhao, Y. (2018). Auditing related party transactions: evidence from audit opinions and restatements. Auditing: A Journal of Practice & Theory, 37(2), 73-106.

Fang, V. W., Huang, A. H., & Wang, W. (2017). Imperfect accounting and reporting bias. Journal of Accounting Research, 55(4), 919-962.

Firth, M., Rui, O. M., & Wu, W. (2011). Cooking the books: recipes and costs of falsified financial statements in China. Journal of Corporate Finance, 17(2), 371-390.

He, L., Sarath, B., & Wans, N. (2019). Material weakness disclosures and restatement announcements: The joint and order effects. Journal of Business Finance & Accounting, 46(1-2), 68-104.

Hennes, K. M., Leone, A. J., & Miller, B. P. (2008). The importance of distinguishing errors from irregularities in restatement research: the case of restatements and CEO/CFO turnover. The Accounting Review, 83(6), 1487-1519.

Hirschey, M., Smith, K. R., & Wilson, W. M. (2015). The timeliness of restatement disclosures and financial reporting credibility. Journal of Business Finance and Accounting, 42(7-8), 826-859.

Hong, W. Z., Wang, X. X., Ping, H. Q., & Information, S. O. (2014). Research on the financial report fraud detection of listed companies based on logistic regression model. Chinese Journal of Management Science, 22(11), 351-356.

Ji, A. E., Kumar, K. R., Pei, H., & Xue, Y. (2019) Does the market value auditors’ industry specializations? Evidence from the contagion effects of restatements. Accounting Horizons, 33(1), 125-152.

Jiang, Y. B., Cui, G., & Wang, Y. W. (2010). The trend and characteristics of Financial Statement Restatements: 2004–2008[J]. Journal of Accounting and Economics, 24(2), 17-27.

Kim, Y. J., Baik, B., & Cho, S. (2016). Detecting financial misstatements with fraud intention using multi-class cost-sensitive learning. Expert Systems with Applications, 62, 32-43.

Land, J. K. (2010). CEO turnover around earnings restatements and fraud. Pacific Accounting Review, 22(3), 180-198.

Lee, T. A., Ingram, R. W., & Howard, T. P. (1999). The difference between earnings and operating cash flow as an indicator of financial reporting fraud. Contemporary Accounting Research, 16(4), 749-786.

Li, Q., & Yan, S. G. (2018). Comparative study of logistic regression accounting fraud identification model and accounting fraud index. Journal of Northeast Normal University (Philosophy and Social Sciences), 294(4), 181-187.

Liou, F. (2008). Fraudulent financial reporting detection and business failure prediction models: a comparison. Managerial Auditing Journal, 23(7), 650-662.

Ma, C., Du, H., & Zhang, J. (2018). Chinese accounting restatement and the timeliness of annual report. Applied Economics, 50(50), 5436-5453.

Murphy, P. R., & Dacin, M. T. (2011). Psychological pathways to fraud: understanding and preventing fraud in organizations. Journal of Business Ethics, 101(4), 601-618.

Office USGA. (2003). Financial statement restatements: trends, market impacts, regulatory responses, and remaining challenges. Government Accountability Office Reports. Retrieved from

Palmrose, Z. V., Richardson, V. J., & Scholz, S. (2004). Determinants of market reactions to restatement announcements. Journal of Accounting & Economics, 37(1), 59-89.

Perols, J., Bowen, R., Zimmermann, C., & Samba, B. (2017). Finding needles in a haystack: using data analytics to improve fraud prediction. The Accounting Review, 92(2), 221-245.

Pfarrer, M. D., Smith, K. G., Bartol, K. M., Khanin, D. M., & Zhang, X. (2008). Coming forward: the effects of social and regulatory forces on the voluntary restatement of earnings subsequent to wrongdoing. Organization Science, 19(3), 386-403.

Plumlee, M., & Yohn, T. L. (2015). An examination of managements’ regulatory filing choices surrounding restatements. Journal of Management Accounting Research, 27(2), 121-144.

Schmidt, J. J., & Wilkins, M. S. (2013). Bringing darkness to light: the influence of auditor quality and audit committee expertise on the timeliness of financial statement restatement disclosures. Auditing: A Journal of Practice & Theory, 32(1), 221-244.

Scholz, S. (2013). Financial restatement trends in the United States: 2003–2013. Washington, DC: Center for Audit Quality. Retrieved from

Securities and Exchange Commission (SEC). (2014). Implementing Dodd-Frank Wall Street reform and consumer protection act – pending action. Washington DC: SEC. Retrieved from

Shipman, J. E., Swanquist, Q. T., & Whited, R. L. (2016). Propensity score matching in accounting research. The Accounting Review, 92(1), 213-224.

Singer, Z., & Zhang, J. (2018). Auditor tenure and the timeliness of misstatement discovery. The Accounting Review, 93(2), 315-338.

Srinivasan, S., Wahid, A. S., & Yu, G. (2014). Admitting mistakes: home country effect on the reliability of restatement reporting. The Accounting Review, 90(3), 1201-1240.

Tan, C. E., & Young, S. M. (2015). An analysis of “Little r” restatements. Accounting Horizons, 29(3), 667-693.

Trompeter, G. M., Carpenter, T. D., Desai, N., Jones, K. L., & Riley, R. A. (2013). A synthesis of fraud-related research. Auditing: A Journal of Practice & Theory, 32(Supplement 1), 287-321.

Wang, T. Y. (2011). Corporate securities fraud: Insights from a new empirical framework. The Journal of Law, Economics & Organization, 29(3), 535-568.

Wei, Z. H., Li, C. Q., & Chen, T. Y. (2010). Determinants of restatement announcements: evidence from China. Journal of Business Economics, 222(4), 75-82.

Wang, X., & Wu, M. (2011). The quality of financial reporting in China: An examination from an accounting restatement perspective. China Journal of Accounting Research, 4(4), 167-196.

Xin, Q., Zhou, J., & Hu, F. (2018). The economic consequences of financial fraud: evidence from the product market in China. China Journal of Accounting Studies, 6(1), 1-23.

Zhang, H., Huang, H. J., & Habib, A. (2018). The effect of tournament incentives on financial restatements: evidence from China. The International Journal of Accounting, 53(2), 118-135.

Zhang, H. H., & Zhang, L. Y. (2017). Managerial tournament incentive and financial fraud: evidence from Chinese listed companies. Business Management Journal, 39(4), 176-194.