Fitch Ratings expects a calmer 2006 for the global accounting industry following a large number of restatements in 2004 and 2005.
In its new report, "Accounting and Financial Reporting Risk: 2006 Global Outlook - Serenity Now?," the ratings agency said that companies, standard-setters and auditors are continuing to improve implementation of a number of new standards, but questions of interpretation still leave open the potential for accounting risk.
The Fitch report also explores how financial information may be affected by the dwindling number of major audit firms, issuers' ability to retain quality auditors and the changing nature of the auditor-management relationship.
In terms of flexible interpretation of accounting standards, among the problematic areas identified by Fitch are accounting rules for:
- Pensions and other post-employment benefits;
- Stock options;
- Interpretation of cash flow statements;
- Merger and acquisition accounting;
- Derivative and hedge accounting;
- Securitization accounting;
- Impairment charges; and,
- Lease accounting-related issues.
Through the first 10 months of 2005, Fitch noted that 971 U.S. public companies restated their earnings, compared to 619 for all of 2004. Fitch expects much less restatement activity, with the main effect of the Sarbanes-Oxley Act's internal controls provisions having been seen in 2005.However, outside the United States, the report noted that wide-scale reporting will be made under International Financial Reporting Standards for the first time -- likely resulting in different interpretations of the standards, and leading to restatements in the future.The report can be found on the Fitch Ratings Web site, at www.fitchratings.com .
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