Abstract The article examines the incidence of accounting errors in various firms in the United States. The Accounting Principles Board Statement No. 20 (1971) defines financial statement errors as items resulting from mathematical mistakes, mistakes in the application of accounting principles, or the oversight or misuse of facts that existed at the time the financial statements were prepared. This definition encompasses both intentional and unintentional misrepresentation by management. Errors affecting previously reported earnings are revealed as prior period adjustments as specified in Statement of Financial Accounting Standards No. 16 (1977). If the erroneous year's financial statements are presented, retroactive restatement is required. Footnote disclosure of the nature of the error and its effect on earnings, earnings before extraordinary items, and earnings per share is also required. Although financial statement disclosures generally provide no indication that prior errors were intentional, they may be motivated by the same types of economic incentives influencing managers' choices of accounting methods or management of accruals.
DeFond et al. (Mon,) studied this question.