The State of Restatements: Sharply Falling

Since the post-Sarbox peak, companies are filing far fewer restated financials — 869 last year, off 29.6 percent after the prior year's 31.4-percen...
Stephen TaubMarch 10, 2009

For the second straight year — after six years of Sarbanes-Oxley-related increases — the number of corporate financial restatements fell in 2008.

Last year, public companies filed 869 restatements, down 29.6 percent from the 1,235 restatements filed in 2007, according to a new study from Audit Analytics. This nearly matched the 31.4-percent decline in the prior year. The number of unique filers fell about 12 percent, to 778 in 2008.

The figures are the lowest since 2003, the year before Sarbox provisions went into effect for the largest companies.

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The report also found almost no change in the severity of the revisions in a number of key areas. For example, the typical 2008 restatement involved a negative adjustment of $6.1 million — down sharply from $22.5 million in 2006, and from $20.5 million in 2005.

In addition, roughly one-third of restatements in 2008 had no impact on income statements. In recently the ratio of no-impact to impact was one-to-four. Also, the period covered by restatements shrank to an average of 479 days in 2008, from a peak of 747 days in 2005, and from 718 in 2006.

The average number of accounting issues identified in the restatements also fell 33 percent last year, to 1.66 from 2.43 in 2005. In addition, the number of days a company required to file a restatement dropped dramatically in 2008, to about 11 days from nearly 59 days in 2006.

One thing that has not changed much: the issues that cause restatements. The top eight issues in 2008 were the same common restatement causes troubling companies for seven years – except for cash-flow statement classification errors, which has steadily increased in prevalence. It ranked as the third-most-common issue last year, according to Audit Analytics.

In 2008, these were the top eight accounting issues implicated in restatements: debt; quasi-debt; warrants and equity security issues; expense recording issues (payroll, SG&A, other); cash-flow statement (SFAS 95); deferred, stock-based, or executive compensation issues; acquisitions, mergers, disposals, or reorganization accounting issues; revenue recognition issues; tax expense, benefit, deferral, and other (FAS 109) issues; liabilities, payables, reserves, and accrual estimate failures.

One major cause for concern continues to be the number of “stealth restatements.” The Securities and Exchange Commission requires companies to disclose within four business days a determination that past financial restatements should no longer be relied on. This disclosure must appear in Item 4.02 of an 8-K, Audit Analytics notes. The group defines a stealth restatement as one that is contained in a periodic report, without a prior disclosure in Item 4.02.

Although the number of stealth restatements has decreased since 2006, their percentage increased to about 51 percent in 2008, according to the report – the first time the percentage represented more than half of restatements.

The study was compiled from data contained in the Audit Analytics database. Restatement records originated from one of two sources: 8-Ks or periodic reports (10-Ks, 10-K/As, 10-Qs, 10-KSB, etc.). The restatement database covered all types of filer types: accelerated filers, non-accelerated filers, funds and trusts, new company registrations, small business filers, and foreign registrants.