Restatements on the Decline

Sarbox and a more tolerant SEC may be why companies are restating financial results less frequently, says a new report.
Alix StuartMarch 4, 2010

The number of financial restatements fell in 2009 for the third year in a row, according to a new report. The report, by research firm Audit Analytics, posits that the Sarbanes-Oxley Act and the Securities and Exchange Commission are behind the decline.

Overall, 630 companies filed 674 restatements last year, says the report, representing a 27% decline from 2008. The number of restatements peaked in 2006, when 1,564 companies filed 1,795 restatements (see chart below).

The severity of restatements also declined, at least for companies listed on major stock exchanges. Last year 232 such companies restated, losing an average of $4.6 million from net income. That was down from 301 companies and $7.2 million in 2008 and 389 companies and $8.6 million in 2007. The change in average size is even more dramatic compared with 2002, when restatements reduced net income by an average of $76.5 million per company.

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For 30% of those 232 companies, the restatement had no impact at all on net income, while for 16% it had a positive effect, according to the report.

“There are a lot of restatements out there, but sometimes the consequences just aren’t as dramatic as you think,” says Donald Whalen, director of research at Audit Analytics and author of the report.

The report attributes the decline in restatements to two factors: improved internal controls as a result of Sarbox, and a 2008 recommendation by the SEC’s Advisory Committee on Improvements to Financial Reporting that the agency relax its requirements on what types of errors should trigger restatements.

“Frankly, I was pleasantly surprised,” says Dennis Beresford, an accounting professor at the University of Georgia’s J.M. Tull School of Business and a member of the CIFR. “It’s always hard to know exactly what the reasons were, but I’d like to think it was a combination of better financial reporting, better auditing, and hopefully a little more reasonableness in terms of applying materiality [as to what needs to be restated].”

Audit Analytics’s data suggests that restatements are getting faster and perhaps procedurally easier as well. For the 630 companies, it took an average of 10.4 days between when they first announced the need to restate and when they filed the restated numbers, down from 17.6 days in 2008 and 20 days in 2007. Also, the average number of issues addressed by a restatement has steadily dropped since 2005, from 2.43 to 1.48 in 2009, and the restatements have covered a progressively shorter time span.

The reasons companies are restating didn’t change dramatically from previous years. Debt, quasi-debt, warrants, and equity security issues collectively remained at the top of the list, followed by expense-recording issues and cash-flow classification errors (the latter moved up from ninth place in 2008).

Not surprisingly, the majority of companies issuing restatements — 374 of the 522 U.S.-based restaters — were nonaccelerated filers, smaller companies that don’t yet need to conform to auditor reviews under the internal-controls provision of Section 404 of Sarbox. But there may be practical reasons for that result as well. One, there are more nonaccelerated filers than accelerated ones, and two, “the same complicated accounting rules that apply to the big boys apply to them, and they don’t have quite the same tools and staff, so it’s just statistically more likely they’ll have problems,” says Beresford.

To be sure, investors didn’t necessarily turn a blind eye to restatements, and some companies paid a big price as a result. For example, Huron Consulting Group saw its stock price drop from $44.35 to $13.69 the day after it announced it would restate its three previous fiscal years and the first quarter of 2009. The resulting drag on its share price in fact triggered a $106 million goodwill write-down last year, the company recently disclosed.


Restatements in 2009