Restatement of In-Process Research and Development Write-Offs: The Impact of Sec Scrutiny

42 Pages Posted: 18 Sep 2001

See all articles by Eric Press

Eric Press

Temple University - Department of Accounting

Thomas D. Dowdell

North Dakota State University

Date Written: September 2001

Abstract

In 1998, SEC Chairman Arthur Levitt voiced his concerns about earnings management, including understatements of earnings. SEC Chief Accountant Lynn Turner communicated his opposition to "excessive" write-offs of In-Process Research and Development costs (IPRD) in September 1998. We document how the SEC-using channels other than formal standard setting and enforcement actions-affected registrants' reporting of IPRD transactions.

We investigate factors associated with large IPRD write-offs in the software and computer services industry, and test whether firms managed their earnings with IPRD, as alleged by the SEC. In addition, we examine factors associated with the resulting IPRD restatements, and assess their valuation impact. IPRD write-offs-as a percentage of assets acquired-shrink by more than half in the period following the SEC's guidance. We observe companies that initially expense large amounts of IPRD faced high investor expectations, and the stock price impact of write-off restatements is reliably negative. The results demonstrate the potent impact the SEC's opinions on proper accounting practice have on companies' financial reporting, even when the agency is not officially setting new standards.

Keywords: In-process research and development costs; Write-offs; Restatements, SEC

JEL Classification: M41, K22, G12

Suggested Citation

Press, Eric G. and Dowdell, Thomas D., Restatement of In-Process Research and Development Write-Offs: The Impact of Sec Scrutiny (September 2001). Available at SSRN: https://ssrn.com/abstract=283482 or http://dx.doi.org/10.2139/ssrn.283482

Eric G. Press (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215-204-8127 (Phone)
215-204-5587 (Fax)

HOME PAGE: http://oll.temple.edu/epress/

Thomas D. Dowdell

North Dakota State University ( email )

Department of Accounting & Information Systems
Minard Hall
Fargo, ND 58105
United States

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