Abstract: Based on misreporting incentive of related-party transactions (RPTs), this paper examines the effect of RPTs on accounting misstatements. The main findings are as follows: firms engaging in RPTs are more likely to misstate their accounts and the misstatements concentrate in the related transactions of goods and services; the amount of RPTs in goods and service sales is positively associated with the incidence of misstatements, but the amount of RPTs in other segments is not significantly associated with the incidence of misstatements. Furthermore, this paper examines whether firms would adjust RPTs to cope with misstatement risk following financial restatement. The findings indicate that the amount of RPTs in all segments decreases in the first two years after financial restatement, but the change is less pronounced for RPTs in goods and service sales from the second year on. Further analysis indicates that the positive effect that RPTs in goods and service sales have on accounting misstatements mainly exists in RPTs that occur within a business group, and the decrease of RPTs following restatement mainly exists in RPTs that do not occur within a business group. This indicates that the so-called attempt to reduce RPTs following restatement and regain reputation is just to strike an attitude.

Key words: financial restatement, accounting misstatements, related-party transactions, incentive, group