Maybe 2004 should have been called the year of the restatement -- amended filings for financial restatements by public companies due to accounting errors rose 28 percent in 2004, to a record 414, up from 323 the previous year, according to a report by Huron Consulting Group.
Similar to the prior years, five categories of accounting issues caused nearly 60 percent of the problems in 2004 financial restatements. The three leading causes were: revenue recognition; equity accounting; and reserves, accruals and contingencies, according to Huron's 2004 Annual Review of Financial Reporting Matters, which analyzed restatements filed in amended filings with the Securities and Exchange Commission for the year ending Dec. 31, 2004.
After leveling off in 2003, financial restatements increased dramatically in 2004, Huron noted. In comparison, 2002 had 330 restatements, 2001 had 270, and 2000 had 233.
"It seems that the scrutiny placed on company internal controls and other pressures surfaced a large number of reporting problems this past year," said Joseph J. Floyd, managing director and national practice leader of Huron's disputes and investigations practice.
While several trends and events affected financial reporting in 2004, the impact of Sarbanes-Oxley Section 404 procedures was among the most significant, according to Floyd, who noted, "The intense focus brought by Section 404 and its requirements for the management of public registrants to thoroughly document, test and take responsibility for the effectiveness of their company's safeguards for quality financial reporting has resulted in an unprecedented period of scrutiny on how registrants produce financial results for investors."
Huron's analysis showed that in 2004, 63 restatements, or 15 percent, were filed by "repeat filers," or registrants that reported erroneous financial information on more than one occasion since 1997 -- a sign that fewer companies are contributing to the problem than the number of filings would indicate, according to Huron's Floyd.
In 2004, the number of filings involving restated annual audited financial statements rose to a record 253, representing 61 percent of total restatements filed during the year, compared to 64 percent in 2003, 56 percent in 2002, 52 percent in 2001 and 42 percent in 2000.
For the fifth consecutive year, Huron said that the number of filers reporting errors in at least three of the prior annual periods rose to nearly 40 percent of the 10-K/A filings -- a trend that points to flawed accounting policies, practices and errors occurring over a period of time, as opposed to one-time errors, Floyd noted.
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