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2014 Financial Restatements Review

Latest Results Show Continuing Positive Restatement Trends

For the sixth consecutive year, Revision Restatements, or those that do not undermine reliance on past financials, rose to 76% of all Restatements reported. On the flip side, Reissuance Restatements, which require disclosure in Item 4.02 of an 8-K and are more likely to have a negative market reaction, decreased.

Among accelerated filers, there were a total of 47 Reissuance Restatements. Of those, KBR Inc. had the highest observed adjustment to net income at $154 million. Nevertheless, KBR’s adjustment was the most modest of the largest annual negative restatements in the past thirteen years. $154 million is a drastic decline compared to, say, the $6.3 billion negative restatement made by the Federal National Mortgage Assoc. (Fannie Mae) in 2004, or the $5.2 billion restatement made by American International Group Inc. (AIG) in 2005.

Looking back, the number of restatements peaked in 2006 with 1,842 disclosures. After a remarkable decrease down to 761 in 2009, restatements reached what looked like a baseline with 836 disclosures in 2010, remaining in the 800s for the next four years.

While the total number of financial restatements has remained relatively low, Tammy Whitehouse from Compliance Week noted “contrary to all the good news, however, restatements among accelerated filers are not falling.” As depicted by the table below, there was an increase in restatements by large public companies known as Accelerated Filers for the fourth year in a row. In 2010, a total of 171 U.S. Accelerated Filers disclosed restatements. This number increased to 211 companies in 2011 followed by 284 in 2012 and 308 in 2013. Another slight increase in 2014 brought the total to 309 restatements from U.S. Accelerated Filers.

Consistent with trends disclosed in our 2012 Restatements Review, virtually all of the following severity indicators tracked by Audit Analytics remained low in 2014:

  1. The negative impact on net income
  2. The average cumulative impact on net income per restatement
  3. The percentage of restatements with no impact on income statements
  4. The average number of days restated
  5. The average number of issues identified in restatements

Perhaps these low indicators and continuing positive restatement trends show, as Maxwell Murphy of the Wall Street Journal notes, “…that the Sarbanes-Oxley corporate-governance law has succeeded in bolstering companies’ internal controls over financial reporting.”

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