While the occurrence of quadrophobia in a company may represent legitimate accounting discretion and may not necessarily indicate any potential violations of accounting standards or efforts to manage earnings, the study took a deeper look to determine, if management practiced strategic EPS rounding, would they be more likely to engage in other forms of problematic financial reporting behavior.
Based on their analysis of companies with an identified history of quadrophobia, they show that companies with high quadrophobic scores are significantly more likely to:
- Restate their financial statements
- Be named as defendants in Securities & Exchange Commission (SEC) Accounting and Auditing Enforcement Releases (AAERs)
- Be involved in class action securities fraud litigation
Source: Four is the Loneliest Number: How strategic rounding of EPS results may predict aggressive financial reporting, Jim Barratt