Accounting Restatements and Institutional Ownership The Case of the UK



cal Results 29 Chapter 6: Conclusion and Implications of the Research 35 6.1 Objectives and Summary of Research 35 6.2 Summary of Results, Comparison with Previous Research Findings 36 6.3 Discussion and Conclusion 37 References 39 Appendices 51 Chapter 1: Accounting Restatements 1.1 Introduction The occurrence of the accounting restatements has amplified considerably in the recent period. For instance, in the United States alone, the count of accounting restatement declarations increased from 90 to 1,577 during the period 1997-2006 (Scholz, 2008). Consequently, there has been a development of keen interest in the reasons as well as the outcomes of the accounting restatements (Palmrose &amp. Scholz, 2004. Hribar &amp. Jenkins, 2004). One of the significant findings from the previous studies on accounting restatements is the extensive loss in market value that occurs when a company issues its financial restatements. This loss is around 9% across all financial restatements while it is greater than 20% when the accounting restatement is believed to be fraudulent or instigated by the auditor (Palmrose &amp. Et. Al, 2004). The General Accounting Office (GAO) identified a loss of around $100 billion in the market value of the 689 public companies that issued accounting restatements in the phase between 1997 to 2000 (GAO, 2002). There are several factors that can possibly impel the companies to issue financial restatements. Some of these factors are flaws in corporate governance (Ebrahim, 2007. Agrawal &amp. Chadha, 2005), managers’ inducements to inflate the prices of their stock option or obtain finance at favourable rate of interest (Erickson &amp. et. al. 2006. Beneish 1999. Richardson &amp. et. al. 2002, Carcello &amp. Palmrose 1994), and inferior auditing services among others (Francis et al. 1999. Becker et al. 1998). According to researches, the occurrence of financial restatements not only impacts the financial health of the company but also its corporate governance traditions which is again subjective to the inclusion of the institutional investors (Baber &amp. Et. Al., 2009). This research study would focus on the association existing amid corporate governance of the public companies listed in the London Stock Exchange and their reluctance or non-reluctance of restating financial statement. The study would be conducted contemplating the influence of institutional investors on the corporate governance of the publicly listed companies. 1.2 Motivations for Studying the Issue Several studies corroborate the rising occurrences of accounting restatements by the public companies in the US and the UK. The structure of institutional ownership helps in the identification of the divergence of interest between the institutional investors and the public companies of these countries. Nevertheless, there are not many researches that have been confirmed to be effectual in compiling these facts and comprehensively signify the correlation between the recognized factors (Audit Committee Institute, 2007). Furthermore, the accounting standard practiced in the public companies of UK had been altered lately so as to eliminate the occurrence of irregularities in the presentation of financial statements. This change in the accounting practices of the UK public companies also influenced the institutional ownership, in addition to the interests of managers in terms of