Small Companies Lead Pack of Restatements

Smaller companies more often restated their financial results through the third quarter of 2006 than the largest companies, a financial research firm has found.

Glass, Lewis & Company, which tracks the number of restatements by U.S. companies, said companies with market capitalizations of less than $75 million filed the most restatements in the first nine months of 2006, compared with the same period in 2005. Overall, the number of restatements rose 12 percent to 1,063, compared with 952 in the 2005 period, the report said.

The San Francisco-based firm says that larger companies – with market capitalizations of $750 million or more – had fewer restatements.

Glass, Lewis & Company points to Sarbanes-Oxley as the reason for the disparity, the New York Times reported. Big companies were required to enact the strict financial controls under Section 404 earlier so their balance sheets are cleaner. Smaller companies haven’t yet made the changes that could prevent errors in financial statements because the deadline has been extended.

"Simply put, micro-cap companies haven't yet had to comply with SOX 404," Glass Lewis researchers wrote in the report. "As such, their lax internal controls, which remain untested by independent auditors, continue to produce materially erroneous financial reports."

Scott A. Taub, the acting chief accountant of the Securities and Exchange Commission, commented on the large number of restatements (1,195 in all of 2005) in a Nov. 17 speech. “Some suggest the large number of restatements shows that an overly conservative attitude pervades, resulting in restatements for errors that simply are not material," he said. "Others believe that the large number of restatements shows that the reforms of recent years are working, causing companies to look harder at financial reporting and correct errors that arose in earlier years. Others argue that the rise in restatements can be traced to the increased complexity of accounting standards and reporting rules.”

Taub said that his staff informally reviewed restatements from 2003 to 2005 to see what companies were saying about the errors. He said that well over half of the errors were caused by “ordinary books and records deficiencies or by simple misapplications of the accounting standards.”

Stock options backdating probes triggered some of the restatements last year, Reuters reported.

Through the first nine months of 2006, 14 companies had filed restatements related to the timing of stock option grants. By December, 84 companies had announced they would need to restate financials to correct accounting for prior stock option grant awards, the Glass Lewis report said.

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