Corporate Governance

Restatements Decline with the Assistance of the SEC

By Fei-Lu Qian

According to a new study from Glass, Lewis & Co., there was a significant drop in the number of financial restatements filed by companies to correct accounting errors. Specifically, in 2007 there was a 17% decline in restatements, compared to the previous year. Moreover, for the first three months of 2008, there was a 21% decline in restatements from the comparable period in 2007. Click here for story.

One innocent explanation for the decline is that companies are used to the compliance requirements of the Sarbanes-Oxley Act which includes internal control tests and independent audits. An alternative explanation for the decline is the SEC advisory committee?s new guidelines which are ?designed not to reduce the number of errors, but the number of corrections.? In other words, the SEC is telling public companies not to restate when it is not necessary and only correct their financials when they are significant to ?investors making current investment decisions.? Glass Lewis sees the SEC?s approach as flawed because the ?goal should be to ensure accurate financial statements that are comparable across multiple periods and companies.?

The report also noted that the most common errors were related to expense recognition, misclassifications, and improper accounting for equity items. Interestingly, Deloitte & Touche was associated with the highest auditor restatement rate and KPMG had the lowest rate.

Full post as published by PomTalk on June 04, 2008 (boomark / email).