The Importance of Separating the Probability of Committing and Detecting Misstatements in the Restatement Setting

F. Jane Barton (), Brian M. Burnett (), Katherine Gunny () and Brian P. Miller ()
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F. Jane Barton: Zicklin School of Business, Baruch College, New York, New York 10010
Brian M. Burnett: Belk College of Business, The University of North Carolina at Charlotte, Charlotte, North Carolina 28223
Katherine Gunny: Denver Business School, University of Colorado, Denver, Colorado 80202
Brian P. Miller: Kelley School of Business, Indiana University, Bloomington, Indiana 47405

Management Science, 2024, vol. 70, issue 1, 32-53

Abstract: This study demonstrates the importance of separating the probabilities of misstatement occurrence and detection when examining financial statement restatements. Despite the many benefits of examining the probability of restatements using traditional logistic models, interpretations of these models are clouded by partial observability—only subsequently detected misstatements are observable. We propose addressing this often overlooked issue by implementing a bivariate probit model with partial observability. We demonstrate the importance of separating these latent probabilities by re-examining three prior restatement studies and show the importance of separating the occurrence and detection probabilities. Our evidence suggests that future studies interested in restatements as a measure of accounting quality should consider implementing bivariate probit models as one way to address the partial observability inherent in this setting.

Keywords: misstatements; restatements; occurrence and detection; bivariate probit (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:1:p:32-53

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