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Financial Restatements Took Downward Turn in 2015, Audit Analytics Finds

Jun 8th 2016
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Financial restatements overall dropped slightly in 2015, though the tally of revision restatements was among the highest in a decade, according to a new report by research firm Audit Analytics.

In breaking out the two types of restatements, the report indicates that the numbers of the more severe reissuance restatements were the lowest since 2004, when they were first required to be disclosed on 8-Ks. (Reissuance restatements are disclosed on 8-Ks because prior financials aren’t reliable and must be reissued.) The total number of reissuance restatements and the number of companies restating reached a low of 161 disclosures issued by 141 companies in 2015.

On the other hand, the far less severe revision restatements were the bulk of disclosed restatements at 76.2 percent, despite declining to 516 from 605 in 2014. According to the report, that tied for the highest percentage of revision restatements since 2005. Revision restatements are adjustments in reports without prior 8-K disclosure. They “presumably, [don’t] undermine reliance on past financials,” and are far less disruptive to the market, according to the report.

Taken together, the overall number of restatements dropped 12.7 percent in 2015 and their severity was considered low. That’s based on quantifying the 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, and average number of issues identified.

The average number of issues in restatements in 2015 was 1.57, considered a bit more than during the prior six years but lower than the 2.42 issues per restatement in 2005.

Audit Analytics indicates the following were the top 10 restatement issues in 2015, with the first two in the same slot for the past five years.

  • Debt, quasi-debt, warrants and equity security
  • Cash-flow statement
  • Tax expense, benefit, deferral and others
  • Liabilities, payables, reserves and accrual estimate failures
  • Foreign, related party, affiliated or subsidiary
  • Revenue recognition
  • Expense (payroll; selling, general, and administrative; other) recording
  • Accounts and loans receivable, investments and cash
  • Inventory, vendor and/or cost of sales issues
  • Acquisitions, mergers, disposals, reorganization accounting

Audit Analytics’ restatement database holds more than 15,000 restatements or nonreliance filings disclosed by more than 9,000 US Securities and Exchange Commission public registrants since January 2001, according to the report. The database also contains more than 40 accounting error categories. Restatement records are originated from one of two sources: 8-Ks or periodic reports (10-Ks, 10-K/As, 10-Qs, 10-KSB, 40F, 20F, etc.), the report states.

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