Wednesday, April 09, 2008

Blame for restatements may need a rethinking

The growing number of companies restating their financial results has been cited as a reason to ease U.S. accounting standards by the Securities and Exchange Commission and Treasury Department. But the restatement problem may not be the big bad wolf it was originally thought to be.

Two studies released recently indicate that not only have restatements begun to decline, but they may be caused more by basic company errors than by complex accounting standards that companies have a hard time applying. Although proponents of reducing accounting complexity still think restatements are a problem, the studies could provide ammo for those looking to preserve the current regime.

According to one of the studies, released in February by Audit Analytics, an independent research firm in Sutton, Mass., restatements declined last year for the first time since 2001, with only 1,237 restatements disclosed. That was the lowest level in three years and marked a 30% drop from the 1,801 restatements that public companies disclosed in 2006. It was also lower than the 1,545 restatements in 2005, but higher than the 1,029 restatements in 2004.

...the move toward converging U.S. generally accepted accounting standards with international financial reporting standards may result in the need for more management judgment. And, since management judgment is a big, though not overwhelming, cause of restatements, more judgment could mean more restatements.

Labels: Audit Analytics, management judgement, restatement studies, SEC (Securities and Exchange Commission)

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