The Treasury Department has released a report on The Changing Nature and Consequences of Public Company Financial Restatements as part of an effort to encourage U.S. capital markets competitiveness. 

"Many respected voices at Treasury's Capital Markets Competitiveness Conference last year noted the drastic increase in financial restatements over the last decade," said Treasury Secretary Henry Paulson (pictured) in a statement. "It is important to take a hard look at the facts behind this rise."

He noted that the information in the study would complement the work underway at the Securities and Exchange Commission and the Financial Accounting Standards Board to improve financial reporting for investors.

The study, conducted by University of Kansas Professor Susan Scholz, provides an in-depth look at the soaring number of financial restatements in the years before and after the Sarbanes-Oxley Act.  Financial restatements grew nearly eighteen-fold in this time, from 90 in 1997 to 1,577 in 2006 with acceleration in restatement activity occurring in 2001 before the implementation of the Sarbanes-Oxley Act.

However, restatements associated with fraud and revenue declined after 2001. Fraud was a factor in 29 percent of all 1997 restatements, but only 2 percent of 2006 restatements. The proportion of revenue-related restatements also decreased from 41 percent in 1997 to 11 percent in 2006.

Market reactions to the restatements dampened over the decade study period, while the number of restatements grew. Market reaction to financial restatements tended to be more negative when the restatement involved fraud or revenue errors. 

Additionally, the study noted that restating companies are typically unprofitable even before the restatement.  In the year prior to announcing a restatement, more than half of restating companies reported a net loss.

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