By Frank Byrt
While the overall number of financial restatements by US public companies has decreased over the last four years, large company restatements have been on the rise, according to research conducted and published by Audit Analytics in the 2012 Financial Restatements: A Twelve Year Comparison report.
Across all public companies, restatements fell from 820 in 2011 to 768 in 2012. Restatements peaked at 1,771 in 2006, fell to 922 in 2008, and dropped again to 803 in 2010.
Last year, 245 large companies had to restate their financials. That's up 21 percent from 202 in 2011, and up 60 percent from 153 in 2009. Large companies, as defined by the Securities and Exchange Commission (SEC), are those with stock values over $75 million.
While smaller public firms reported 386 restatements last year, they were down 2.5 percent from 2011 and down 55 percent from the 2006 peak of 865, according to the report.
Largest Write-Downs to Net Income
The largest write-downs to net income caused by restatements over the last eleven years of New York Stock Exchange registered companies were:
- 2012: JPMorgan Chase, $459 million
- 2011: China Unicom (Hong Kong) Ltd., $1.56 billion
- 2010: Telecom Italia, S.p.A., $717 million
- 2009: USB AG, $357 million
- 2008: TMST Inc., $671 million
- 2007: General Electric, $341 million
- 2006: Navistar International Corp., $2.4 billion
- 2005: American International Group Inc., $5.2 billion
- 2004: Fannie Mae, $6.3 billion
- 2003: HealthSouth Corp., $3.5 billion
- 2002: Tyco International Ltd., $4.5 billion
Donald Whalen, director of research at Audit Analytics told AccountingWEB there's no clear evidence in the just-finished report indicating why there's been a rise in restatements at the largest companies. "We're still researching it. It's been frustrating, as we do usually get a sense of why."
He speculated the increase could be driven by more aggressive activity on the part of the regulators – the SEC and Public Company Accounting Oversight Board (PCAOB).
Whalen said anecdotally, in talking to his firm's clients, which include all the largest accounting firms, "The PCAOB has reportedly gotten very good at picking certain [companies for] inspections where there's more of a likelihood of a mistake."
According to the research, in addition to the number of total restatements leveling off in the past few years, the average number of problem issues cited as the cause for a restatement dropped to 1.38 issues per restatement, the lowest during the twelve years under review and a steady decline since 2005. The indicators of how severe the problems were that caused the restatements have dropped steadily as well, "with some indicators achieving the best value for all the twelve years under review."
When considering the adverse effects of restatements filed in 2012, Audit Analytics found low indicators of severity with respect to each of the following criteria:
- Negative impact on net income
- Average cumulative impact on net income per restatement
- Percentage of restatements with no impact on income statements
- Average number of days restated
- Average number of issues identified in restatements
The most common accounting issues that resulted in restatements in 2012 and the rate of their occurrence were:
- Improper measurement of debt, stock warrants, and equity: 15 percent
- Tax expense/benefit/deferral and other (FAS 109) issues: 14.6 percent
- Cash flow statement classification errors: 13.3 percent
- Acquisitions, mergers, and reorganization accounting issues: 12.1 percent
- Revenue recognition issues: 9.5 percent
- Accounts/loans receivable, investments, and cash valuation issues: 8.7 percent
- Liabilities, payables, reserves, and accrual estimate failures: 8.3 percent
For its report, Audit Analytics used data from more than 12,000 financial restatements and/or nonreliance filings disclosed by over 7,000 SEC public registrants since January 1, 2001.