US Company Financial Restatements Down Sharply in 2007
Both the number and severity of financial restatements by US public companies fell last year, as firms adapted to the more rigorous financial reporting standards introduced after the collapse of Enron, Worldcom and others. A Seven-Year Comparison just released by Audit Analytics finds that during 2007, a total of 1237 restatements were filed by 1109 unique companies. These numbers represent a 31% drop in the number of restatements (1801 down to 1237) and a 30% drop in the number of unique filers (1581 down to 1109).
This trend appears to indicate that publicly traded companies are adapting to the more rigorous conventions, with respect to financial reporting, adopted in response to, and in conjunction with, the Sarbanes Oxley Act of 2002 and other rules adopted to improve the accuracy and reliability of corporate financial disclosures since the collapse of Enron and Worldcom, the report says.
“Moreover, since the 2006 equity market crisis, corporations have shifted their funding focus more into debt markets. This trend continued into 2007, albeit the equity markets recovered significantly during the year.”
Audit Analytics said restatements were less severe in 2007. “Indeed, a list of Top-5 most adverse restatements during the last three years shows that the worst restatement for 2007, a negative 341-million-dollar adjustment by General Electric Co., is smaller than the lowest-listed (fifth-worse) restatement for either 2005 or 2006 (negative $514 million and $360 million, respectively).
In 2007, the top six accounting issues implicated in restatements were consistent with prior years, as follows:
- Debt, quasi-debt, warrants & equity ( BCF) security issues;
- Expense (payroll, SGA, other) recording issues;
- Revenue recognition issues;
- Deferred, stock-based and/or executive comp. issues;
- Liabilities, payables, reserves and accrual estimate failures; and
- Acquisitions, mergers, disposals, reorganization accounting issues
However, the seventh issue, cash flow statement (SFAS 95) classification errors, is an issue that consistently grew in prevalence during each of the last six years.
Only 0.49% of the restatements filed in 2001 restated cash flow. In 2002, however, the percentage increased to 1.55% and stepped up each year to reach a value of 11.35% by 2007.
The complete Audit Analytics Restatement Report is available for purchase.
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