Reporting Misstatements as Revisions: An Evaluation of Managers’ Use of Materiality Discretion

In recent years, firms reporting revisions of prior financial statements outnumber firms reporting restatements. Misstatements that are material to prior periods are required to be transparently disclosed as restatements, whereas immaterial errors can be reported as revisions. Based on SEC guidance and widely used materiality benchmarks, I find that a significant proportion, approximately one third, of revisions are “suspect” in that they meet at least one materiality criterion. These "suspect" revisions are more likely to be reported when managers have a strong incentive to avoid restatements, in particular, when they face the threat of compensation clawback for reporting a restatement. Overall, this evidence suggests that materiality discretion is being used opportunistically to conceal material misstatements as revisions.