Auditing

Restatements by Accelerated Filers Shoot Up

And paradoxically, less-trusted companies are doing fewer restatements.
Kathy HoffelderMarch 13, 2013

One might think that accelerated filers, already recognized by the Securities and Exchange Commission as especially trustworthy, would file fewer financial restatements than their nonaccelerated counterparts. Well, think again.

In 2012 there were 21% more restatements by accelerated filers — those with a market capitalization of more than $75 million, among many other criteria — than there were in 2011, according to a new report from Audit Analytics. Further, the number of restatements by such companies was up 60% from 2009. Such companies filed 245 restatements in 2012 and 202 in 2011, but only 153 in 2009.

Why the rise? Audit Analytics research director Don Whalen opines that it’s most likely because of heightened regulation and the increased scrutiny of financial statements by the SEC and the Public Company Accounting Oversight Board (PCAOB) since the Dodd-Frank Act was passed in 2010. Dodd-Frank mandates studies on the effectiveness of all internal controls that could lead a company to restate its financials.

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Still, the jump in restatements by accelerated filers bucks an overall trend of fewer financial restatements during the past four years. The Audit Analytics report shows that among all public companies, the total number of restatements rose 155% from 2002 to 2006, when the number reached 1,771. Since then, though, there have been fewer and fewer restatements, and just 768 by 2012, according to the report, which tracked more than 12,000 restatements from 2001 to 2012 disclosed by 7,000 public firms.

Also notable is the number of companies choosing to disclose their revised information in revision restatements, which, unlike reissuance restatements, don’t require an 8-K filing. Reporting restatements in 8-Ks is more transparent but tends to undermine reliance on past financials and thus is more market-disruptive than revision restatements, notes the report. In 2012, 64.7% of restating filers issued revision restatements, up sharply from 48.1% in 2009.

That news, Whalen says, could influence CFOs who are making decisions on which type of restatement to issue; it may be easier to justify a revision restatement if it’s now the strategy the majority is taking.

Company restatements do tend to ebb and flow depending on the degree of new regulatory activity at any point in time. The report shows a sharp uptick in financial restatements, for example, following the Sarbanes-Oxley Act of 2002.

The PCAOB also lately stepped up its efforts to catch audit deficiencies. A recent report identified problems experienced by smaller auditing firms, with up to 100 public companies. The board will be releasing a similar report on larger auditing firms in the coming months.