There Could Be an Increase in Financial Restatements

by Hiller Hardie 27. December 2011 15:25
As noted by The Wall Street Journal on November 30, the number of financial statement restatements at large US companies had declined for the 5th year in a row. Restatements spiked upward significantly in the initial years of Sarbanes Oxley implementation (2004-2005). This was due largely to the increased scrutiny on the financial reporting process by management and external auditors. Many companies upgraded their internal accounting staffs in response to the new focus placed on financial reporting. The new controls over financial reporting required by Sarbanes Oxley detected errors requiring restatement. Likewise, the decline in the number of restatements can be at least partially attributed to Sarbanes Oxley. As the processes implemented in response to this legislation have matured and been refined, their effectiveness in preventing and detecting errors in financial statements has no doubt increased. However, as author Tammy Whitehouse pointed out in an article for Compliance Week in 2009, there may be other dynamics in play. The SEC staff may be more likely to accept the judgment of the registrant now than in the past, for example. Moreover, the decline in mergers and acquisitions over the last few years (which typically involve complex accounting) may have had an impact on the number of restatements. Likewise, the use of complex financial instruments has declined since the financial crisis took hold; the complexity of the accounting for these transactions is fraught with pitfalls that often result in errors requiring restatement. All of these factors likely had some impact on the decline in restatements. The takeaway: the financial stress imposed by the current economic downturn may result in more fraud. If this is the case, as these activities are uncovered, watch for an uptick in resulting restatements.
Categories: Tax