In a new report, proxy researcher Glass Lewis & Co. said that U.S.-listed companies filed 1,538 financial restatements in 2006, up 13 percent from what had been a record number in 2005.

The paper, “The Errors of Their Ways,” says that figure is equal to nearly one out of every 10 public companies, and includes 118 restatements from foreign issuers. The firm takes a strong position in favor of the internal control provisions outlined under the Sarbanes-Oxley Act, and suggests that they’re doing their job -- restatements by companies that already have had to comply with Section 404 declined 14 percent in 2006, while restatements rose 40 percent among companies that haven’t yet been required to comply with the act.

Glass Lewis criticized the Securities and Exchange Commission and the Public Company Accounting Oversight Board for considering proposals to rollback some of the act’s internal control provisions in response to companies’ complaints about the associated costs.

“Judging by the surge in restatements … we suspect a bigger motivation is that some management teams just want less outside scrutiny,” the report said. “As this report shows, audit fees at public companies are small compared with executive compensation.”

The report also said that:

  • Restatements by companies with $75 million or more in revenues were down 20 percent, while restatements by companies with less than $75 million in revenues were up nearly 50 percent;
  • Restatements by companies audited by one of the Big Four firms were down 32 percent, while restatements by companies audited by one of the smaller firms were up 76 percent; and,
  • The highest auditor restatement rate belonged to BDO Seidman (15.9 percent), while the lowest auditor restatement rate, for the fourth consecutive year, belonged to Ernst & Young (6.9 percent).

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