Restatements Plunge after Record 2006

After a five-year rush in which one in four companies restated, last year's filings are off by 17 percent, and are likely to continue falling, Glas...
Stephen TaubJune 3, 2008

After a decade long run-up, the number of financial restatements filed by companies to correct accounting errors fell sharply last year, according to a new study from Glass, Lewis & Co.

The 17 percent decline, to 1,270 restatements, followed a record high of 1,523 financial revisions in 2006. What’s more, through the first three months of 2008, restatements were down 21 percent from the comparable period in 2007.

The Glass Lewis report also pointed out that 3,953 U.S.-listed companies — about 23 percent — filed at least one restatement during the last five years. The most common error corrections in each of the last five years related to expense recognition, misclassifications, and improper accounting for equity items.

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Among audit firms, Deloitte & Touche had the highest auditor restatement rate: The lowest rate: KPMG.

“Last year’s decline begins a trend that is likely to continue,” Glass Lewis proclaimed.

One reason for this optimism is that the largest public companies now complying with Section 404 of the Sarbanes-Oxley Act, have undergone up to four years of internal-control tests and independent audits. “Thousands of companies have reinforced the systems, checks and balances they maintain to ensure their financial reports are accurate,” the governance research firm added.

It said that another reason to expect fewer restatements has nothing to do with companies making fewer accounting errors. Rather, new guidance expected from the Securities and Exchange Commission designed to reduce the number of “unnecessary” restatements simply will require companies to correct fewer errors.

The new guidelines proposed by an SEC advisory committee are designed not to reduce the number of errors, but the number of corrections, Glass Lewis added. The thinking is that companies should only restate financial statements to correct errors that are important to “investors making current investment decisions,” Glass Lewis explained.

Glass Lewis, however, was very unhappy with this expected development. It asserted that the logic behind some of the committee’s proposals is flawed.

For example, it does not think it makes sense to allow a company to bypass a restatement simply because it isn’t likely to have an impact on a stock price. “We believe if financial reports contain errors companies should correct them through restatements,” it insisted. “The goal should be to ensure accurate financial statements that are comparable across multiple periods and companies.”

Last year, 175 restatements related to stock options, 105 for backdating options, 160 for cash-flow misclassifications and 145 related to debt-and-equity instruments .