Journal of Forensic & Investigative Accounting Vol. 1, Issue 2 Earnings Misstatements, Restatements, and Corporate Governance

and Tyco as well as less celebrated restatements from such companies as Red Hat, Nortel, and Bristol-Myers Squibb have shaken public trust in the U.S. capital market. The restating companies have watched their credit ratings drop, market values erode, and occasionally even faced bankruptcy (Palmrose et al. 2004; Hirschey et al. 2005). The preponderance of restatements, in part, led to the enactment of the Sarbanes-Oxley Act which reemphasized the need for, and the importance of, strong corporate governance. When a company restates its financial statements it is admitting to a material error or irregularity in previously issued financial statements. In this paper, we examine whether changes in corporate governance mechanisms within misstating firms play a role in the detection and correction of financial misreporting. Specifically, we investigate how the corporate governance characteristics of restating firms change from the misstatement to the restatement of accounting reports. Although prior research shows that misreporting firms have weak corporate governanc