The Treasury Department — shocked by the explosion in restatements that now has more than 10 percent of companies correcting errors in previous financials — is commissioning “a rigorous analysis of factors driving financial restatements, and their impact on investors and the capital markets.”

Secretary Henry Paulson, in an opinion column published in today’s Financial Times, referred to “the soaring number of financial restatements over the past decade” as an “emerging challenge,” along with the problems created by a reduction in the number of audit firms in recent years.

According to Paulson’s count, the 1,876 financial restatements filed in 2006 compare with 116 restatements in 1997. “Restatements pose significant costs on our capital markets,” he wrote. “They have the potential to confuse investors and erode public confidence in financial reporting. Some of these restatements might not be material to investors, and others may simply reflect new accounting standards.”

Paulson commended Securities and Exchange Commission chairman Christopher Cox and Financial Accounting Standard Board chairman Robert Herz for their efforts to reduce “the complexity of our financial reporting system,” which the secretary said was in part responsible for the sharp rise in restatements. The analysis envisioned by Treasury is intended to “complement” the SEC and FASB activities, he wrote.

Studying the restatement issue was presented by Paulson as one of “several important steps [being announced by the department today] to ensure we preserve an efficient financial reporting system that provides reliable information, is supported by a sustainable auditing industry, and has enhanced compatibility with foreign reporting standards.” One initiative involved the formation of a non-partisan committee headed by former SEC chairman Arthur Levitt and former SEC chief accounting Donald Nicolaisen to study the audit-firm industry, where just four large firms dominate the profession, and propose improvements.

The opinion-page article by Paulson noted steps by the SEC’s Cox to “enhance the comparability of foreign company financial statements” by moving toward the convergence of International Financial Reporting Standards and U.S. generally accepted accounting principles. The article, however, didn’t give details of what Treasury intended to do with regard to accounting-standard convergence.