An investigation of SEC “Speech GAAP”

This study investigates the financial reporting regulation effects of the Securities and Exchange Commission (SEC) staff comments made during the American Institute of Certified Public Accountants (AICPA) Annual Current SEC & Public Company Oversight Board (PCAOB) Developments Conference in Washington, D.C. (SEC Conference). At this conference, the SEC staff communicates its preferences about areas where it believes companies are misapplying GAAP (Generally Accepted Accounting Principles). We call this communication SEC Speech GAAP. One outcome of the SEC Conference may be that companies re-evaluate their previous financial reporting by restating their financial statements. We find, first, that firms with restatement issues similar to those covered at the SEC Conference experience a decrease in the association between earnings and future cash flows after the restatement. Second, we find little market reaction to the disclosure of restatements related to SEC Conference issues, but the disclosure of non-conference related restatement issues has a significantly negative affect on investors’ valuation decisions. Our findings suggest that SEC Speech GAAP is associated with financial statements that are less informative to investors and investors find the valuation consequences of restatements prompted by SEC Speech GAAP to be less important than the valuation consequences for restatements prompted for other reasons.