Using a sample of companies that restated their earnings over the period
1997–2002, this study finds that the probability of voluntary as opposed
to forced restatements is positively related to the independence of both the
board of directors and the audit committee. Following both voluntary and forced
earnings restatements, companies increase the proportion of independent
directors on both the board and the audit committee; three years after
restatements, both types of restating companies attain similar levels of
director independence. Moreover, the study finds comparable postrestatement
long-run stock performance for all restating and matched companies, which
suggests that postrestatement enhancements to internal control systems help
restore companies’ blemished reputations.