GAO to SEC: Probe 8-Ks for Restatements

Between 2004 and 2005, 111 companies didn't appear to file an 8-K to announce restatements, as is required by SEC guidance, according to the govern...
David KatzAugust 1, 2006

The Government Accountability Office recommended last week that the Securities and Exchange Commission investigate potential noncompliance by public companies with 8-K filing requirements that may have caused restatement information to slip through the cracks.

The SEC should make its guidance to public-company registrants consistent when it comes to required disclosures regarding certain restatements, the GAO said in a July 24 report on financial restatements made to Sen. Paul Sarbanes, the ranking minority member of the Senate Banking Committee.

Between August 23, 2004, and September 30, 2005, 111 companies didn’t appear to file an 8-K to announce restatements, as is required by SEC guidance, according to GAO. (Form 8-K is the “current report” companies must file with the SEC to let shareholders know about major events.) “It appears that these companies either failed to disclose the announced restatement at all or disclosed it in a Form 10-K or 10-Q or an amended form,” according to the report.

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The reason, the GAO contends, is that the SEC provided conflicting guidance—saying in one place that issuers need to file an 8-K if they restate and declaring in another that they need report it only in quarterly and annual reports.

In November 2004, SEC issued a “Frequently Asked Questions” guidance addressing its then-new 8-K disclosure requirements. The FAQ states that a company must issue an 8-K to announce that previously issued financial statements can’t be relied on, even if a 10-K or 10-Q disclosing such information is filed during the 4 business days following the event triggering the non-reliance advisory.

But the newly amended 8-K forms and rules contradict the FAQ, according to the report. “Specifically, the instructions for Form 8-K state that a public company is not required to file a Form 8-K when Â… substantially the same information has been previously disclosed on a periodic report,” the GAO notes.

The GAO called on the SEC to make the guidance to registrants concerning required disclosures regarding certain restatements. In a letter to the government office, John White, the director of the SEC’s corporate finance division, said the division would examine the instances of potential non-compliance and that the SEC would “carefully consider” the GAO’s recommendation to harmonize 8-K filing.

In its report, the GAO also found that while the number of public companies announcing financial restatements from 2002 through September 2005 rose from 3.7 percent to 6.8 percent, the total number of restatement announcements identified soared about 67 percent over the period. The government researchers culled information on 1,390 restatements announced by 1,121 public companies from July 1, 2002, to September 30, 2005.

What produced the restatements? Cost-related reasons—especially including lease-accounting expenses—spawned 35 percent of them, followed by revenue-recognition issues.

The top reasons for restatements have flip-flopped over the last three years, according to the report. From January 1997 through June 2002, 37.9 percent of the restatements were caused by revenue-recognition woes and 15.7 were spurred by cost or expense problems; from July 2002 through September 2005, however, 20.1 percent of restatements were caused by revenue-recognition issues and 35.2 percent were the result of cost-related or expense-related matters.

Further, 58 percent of the 2002-2005 restatements were prompted by such internal parties as management or internal auditors, rather than independent auditors or the SEC, for example, according to the GAO.