Audit Analytics recently released a new report, Financial Restatements: A Twenty-Year Review. This annual report, containing an updated format, takes a closer look at trends in financial restatements, spanning from 2001 to 2020.
When looking at restatements, we categorize them by two levels: reissuance restatements and revision restatements. Reissuance restatements, sometimes referred to as “Big R” restatements, are announced in a Form 8-K item 4.02. These are more serious restatements, as they relate to material errors that call for the reissuance of past financial statements.
In contrast, revision restatements, or “little r” restatements, deal with immaterial misstatements, or adjustments made in the normal course of business. Revision restatements often simply correct an error through a footnote disclosure in current financial statements. Because revision restatements are less severe, they are not generally viewed as a sign of poor reporting.
Some key highlights from this year’s report include:
Financial restatement decline and prevalence of revisions.
In 2020, public companies filed 364 restatements, the lowest observed in the past 20 years.
Revision restatements continue to outpace reissuance restatements at a ratio of 3:1, making up 75% of all restatements during 2020. Throughout the year, just 73 companies disclosed a total of 79 reissuance restatements, compared to 246 revision restatements from 227 companies.
Increased average adjustment on net income.
2020’s average income adjustment per restatement was -$17.6 million, the fourth-highest in the past 18 years. A portion of this jump relates to the high proportion of restatements that had a negative impact on net income throughout the year. In addition, restatements with positive impacts on net income dropped to a historically low average adjustment amount.
Fewer days required to file a restatement.
The Financial Restatement report covers several indicators of restatement severity, including the average number of days it takes a company to file a restatement and the average restatement period.
2020 saw nearly a 40% reduction in the average number of days required to file a restatement. This follows a four-year period of year-over-year increases that began in 2017.
Similarly, the average restatement period – or, the number of days that needed to be restated – also decreased in 2020. This continues a four-year period of year-over-year decline.
Top 5 most common accounting issues cited in restatements.
The average number of issues cited per restatement, another indication of severity, increased in 2020, but the average number is still down nearly 40% since its high point in the mid-2000s.
Revenue recognition was the number one accounting issue contributing to errors or misstatements resulting in a restatement in 2020. Issues related to general expenses jumped in rank in 2020, cracking the top 5 issues for the first time since 2016.
Additionally, this year’s restatement report touches on:
- Largest negative impacts from restatements on an annual basis since 2001;
- Annual vs. quarterly restatement breakdown; and
- Trends in restatements based on company location and filer size.
Looking Ahead: 2021 Report
Looking ahead to next year’s financial restatement report, multiple rounds of restatements aimed at special purpose acquisition companies (SPACs) dramatically altered the restatement landscape in 2021. Consequently, Audit Analytics anticipates a record number of disclosed restatements. As these disclosures occur in 2021, this year’s restatement report does not touch on the impacts from SPAC restatements.
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