The U.S. General Accounting Office released a 262-page report on "Financial Statement Restatements, Trends, Market Impacts, Regulatory Responses, and Remaining Challenges." The report contains the results of an 8-month study. The findings confirm the concerns addressed by the Sarbanes-Oxley Act and underscore the sense of urgency in filling the oversight board with reform-minded individuals.
- The number of restatements due to accounting irregularities has grown significantly. Almost 10% of all listed companies announced at least one restatement between January 1997 and June 30, 2002. This represents a 145% growth rate and it is expected to grow to 170% by year-end. Restating companies lost about $100 billion in market capitalization. Survey results confirm these losses have shaken investors' confidence in the financial reporting system.
- GAO's study also confirms there are "significant questions" about the adequacy of the current system of oversight for auditors, securities analysts and credit rating agencies. Overall, the findings leave no doubt that it is critical that highly qualified individuals be appointed to the Public Company Accounting Oversight Board (PCAOB) and that they fully embrace the need for reform. The PCAOB must provide active leadership and ongoing input to the profession, ensure meaningful audit standards are adopted, and punish wrongdoers appropriately.
The report features case studies on Adelphia, Enron, MicroStrategy, Rite Aid, Sunbeam, Waste Management, Xerox and a number of other companies. Next steps include a more detailed analysis of the 919 restatements identified to date to determine which accounting firms conducted the audits, whether they were new or existing auditors, what role the auditors played in identifying the issue that resulted in the restatement, and whether the auditors raised concerns about any questionable accounting practices before the restatement. These issues will be addressed as part of a study on mandatory audit rotations.
Download the full report.