The number of financial restatements fell last year for the first time since 2001, according to a new report.
Research firm Audit Analytics found that 1,109 different companies made a total of 1,237 restatements in 2007, a 31 percent decrease in the number of restatements and a 30 percent drop in the number of companies, compared to 2006. The trend indicated that publicly traded companies are finally adapting to more rigorous financial reporting conventions, such as those imposed by Section 404 of the Sarbanes-Oxley Act of 2002.
"It looks like SOX 404 is working to some extent," said Don Whalen, director of research at Audit Analytics. "That's what the SEC would hope. It's forcing the registrants and the registrants' auditors to review everything thoroughly. The idea is to improve the financial reporting to allow the public to have more faith in the integrity of the financials."
Increasingly the proportion of restatements is coming from U.S. non-accelerated filers as opposed to U.S. accelerated filers. In 2005, 57.61 percent of U.S. restatements came from non-accelerated filers (776 out of 1347). In 2006, that figure rose to 67.83 percent (1048 out of 1545). In 2007, the figure rose to 71.80 percent (746 out of 1039). However, the overall number of restatements has continued to decline, especially for accelerated filers that have needed to conform to the SOX requirements earlier.
The past two years have also seen a drop in the severity of restatements. In 2005, the typical restatement had a negative impact of $21.22 million, while in 2006 the figure was down to $17.81 million and in 2007 to $3.64 million. The average number of days restated and the average number of issues restated have also dropped in the past two years.
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