The number of financial restatements finally began to decline last year after a decade-long increase and will probably continue to fall as the Securities and Exchange Commission makes it easier for companies to avoid restatements that aren't likely to greatly affect investors.
According to a new report by research firm Glass Lewis, companies with U.S.-listed securities filed 1,270 restatements in 2007, down 17 percent from the peak year of 2006. One out of every 10 companies filed a restatement last year, compared to one out of every nine in 2006.
Last year's decline can be attributed in part to four years of compliance with Section 404 of the Sarbanes-Oxley Act by the largest public companies and the tightening of their internal controls. New guidelines proposed by an SEC advisory committee promise to further reduce the number of "unnecessary" restatements, and Glass Lewis said the SEC is already making it easier for companies to avoid restatements.
"The thinking is that companies should only restate financial statements to correct errors that are important to 'investors making current investment decisions,'" wrote research analyst Mark Grothe. "Despite good intentions, we think the logic behind some of the committee's proposals is flawed."
Glass Lewis also found that restatements by companies complying with SOX 404 fell 5 percent last year and 15 percent a year earlier. Restatements by non-SOX 404 companies fell 24 percent after rising 41 percent. One-third of larger companies and half of microcap companies that restated still claimed to have effective internal controls in place over financial reporting. Forty-six percent of restatements were not filed on amended reports and 41 percent were not accompanied by SEC 8-K "non-reliance" filings.
The most common error corrections in each of the last five years related to expense recognition, misclassifications and improper accounting for equity items. Last year, 175 restatements related to stock options, 105 to backdating options, 160 to cash-flow misclassifications and 145 to debt-and-equity instruments. The highest auditor restatement rate was attributed to Deloitte & Touche and the lowest rate to KPMG. Fewer than 100 companies were in the current restatement pipeline, the fewest since 2004.
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