Tuesday, January 15, 2008

The SarBox: The bill for restatements can be costly

Do financial restatements mean anything these days? The Securities and Exchange Commission Advisory Committee on Financial Reporting is looking into the huge increase in financial restatements by public companies since Sarbanes-Oxley was passed in 2002—a review triggered, at least in part, by SarbOx critics who contend that restatements are expensive, time consuming and of questionable value to shareholders, who increasingly ignore them. The first academic study examining how such restatements affect companies’ ability to secure bank loans, however, suggests that lenders find the information important. In fact, the authors of the report found that businesses that reported financial gaffes—whether intentional or not—ended up paying substantially higher interest rates on loans. The research also revealed that restatements led to stricter terms for borrowers.

The study, conducted by Professors John Graham of Duke University, Si Li of Wilfred Laurier University and Jiaping Qiu of McMaster University, looked at data from a U.S. Government Accountability Office (GAO) database of 919 restatements announced by 800 public companies between Jan. 1, 1997 and June 30, 2002. The professors then combed through a database maintained by Loan Pricing Corp., which collects information on commercial loans made to both U.S. and foreign corporations.

Labels: lending, restatement, sarbox

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