Securitizations and accounting restatements. Issue 4 (3rd December 2018)

• Record Type: Journal Article
• Authors: Wang, Haiping; Zhang, Jing
• Is Part Of: Asian review of accounting. Volume 26:Issue 4(2018)
• Page Start: 571
• Page End: 594
• Publication Date: 2018-12-03
• Subjects: Banks -- Financial crisis -- Accounting restatements -- Auditor industry specialization -- Auditor independence -- Securitizations; Accounting -- Asia -- Periodicals; Accounting -- Pacific Area -- Periodicals; Accounting -- Periodicals; 657.095
• DOI: 10.1108/ARA-10-2017-0151
• Languages: English
• ISSNs: 1321-7348

Abstract

Abstract : Purpose: The purpose of this paper is to establish a direct link between securitizations and accrual-based earnings management by investigating whether financial statements in the periods of securitizations are more likely to be restated at a later time. In addition, this study examines whether the association between securitization and accounting restatements is more pronounced in the pre-financial crisis period and for banks with less independent or industry-specialized auditors. Design/methodology/approach: This study covers a sample of bank holding companies with restatement information between 2001 and 2012. Using the incidence of material accounting restatements as a proxy for accrual earnings management, this study investigates whether securitizations are likely used as a tool for accrual earnings management. A logistic model is applied with standard errors clustered at the firm-year level. Various robustness tests are conducted to rule out the possibilities that the results are driven by unintentional reporting errors or endogeneity of the securitization decisions. Findings: The empirical results reveal a positive and significant association between banks' securitization activities and the likelihood of having accounting restatements. Moreover, this positive association is more pronounced in the pre-financial crisis period and for banks with less independent or industry-specialized auditors. Research limitations/implications: The findings suggest that managers take advantage of discretions on accounting rules for securitizations to manage earnings. This evidence provides multi-dimension implications for standard setters and practitioners, as well as investors. Originality/value: This is one of the very first papers to document evidence that accrual earnings management is involved in securitization.