Accounting & Tax

Record Number of Restatements in 2004

The impact of Sarbanes-Oxley Section 404 was one of the most significant factors to affect financial reporting last year, according to a new report.
Stephen TaubJanuary 21, 2005

Little more than two years after the passage of the Sarbanes-Oxley Act, a record number of companies are revising their financials.

According to a new report by Huron Consulting Group, the number of amended filings for financial restatements surged more than 28 percent, to a record 414 in 2004 from 323 a year earlier.

The 2003 total was actually a slight dip from the 330 restatements in 2002. In 2001 there were 270 amended financials; in 2000, a total of 233.

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“After the leveling off in restatement filings observed in 2003, we had hoped that the upward trend in accounting errors might be over,” said Joseph J. Floyd, managing director and national practice leader of Huron’s Disputes and Investigations practice. “It seems that the scrutiny placed on company internal controls and other pressures surfaced a large number of reporting problems this past year.”

He added that the impact of Sarbanes-Oxley Section 404 was one of the most significant factors to affect financial reporting last year.

“Repeat filers,” defined as companies that reported incorrect financial information on more than one occasion since 1997, accounted for 15 percent of the total. Huron observed that these 63 repeat filers mean that fewer companies are contributing to the problem than the 414 total filings would suggest.

Bear in mind that audit opinions are required only for annual financials and not for quarterly reports. In 2004, the number of restatements involving annual, audited financials rose to a record high of 253, or 61 percent of all restatements for the year. This compares with 64 percent in 2003, 56 percent in 2002, 52 percent in 2001 and 42 percent in 2000.

Restatements are also becoming more extensive. Huron noted that for the fifth straight year, the number of companies reporting errors in at least three of the prior annual periods rose to nearly 40 percent of the 10-K/A filings. “Multiple period restatements point to flawed accounting policies, practices, and errors occurring over a period of time, as opposed to one-time errors,” said Floyd.

The three most frequent causes of financial restatements were revenue recognition, which accounted for 16.4 percent of all restatements in 2004 and 19 percent during the past five years; equity accounting (16 percent and 15.3 percent respectively); and reserves, accruals, and contingencies (14.1 percent and 14.7 percent).