[US] Financial restatements drop, a good sign for reporting quality
July 3, 2024
A study conducted by the Center for Audit Quality (CAQ) found that the number of financial restatements filed with the SEC fell by more than 50% over a recent 10-year period.
Research by the CAQ, which is affiliated with the AICPA, in Financial Reinstatement Trends in the United States: 2013–2022, found 402 financial restatements in 2022, down from 858 in 2013.
The number of financial restatements, defined for the purposes of the study as "corrections of errors in public company financial statements filed with the [SEC]," have been on the decline for 16 years.
"Commonly referenced as a measure of financial reporting quality," according to a summary of the report, financial restatements approached 1,000 in 2004 — shortly after the Sarbanes-Oxley Act revolutionized reporting requirements — and topped out at nearly 1,800 in 2006, before beginning a downward trajectory tracked throughout the period reviewed by the CAQ.
Among other top takeaways from the 46-page report:
Inappropriate accounting for accruals, reserves, and estimates was most frequently cited in company announcements of financial restatements (30%). The misapplication of accounting standards for financing activities such as the measurement of debt, quasi-debt, equity securities, and derivatives was the second-most common reason stated (20%). Fraud was cited in 3% of cases.
The industries filing the most restatements from 2013–2022 were financial, banks, and insurance; health care and pharmaceuticals; and computer and software.
Companies that announced restatements were more likely to have ineffective internal control over financial reporting (ICFR) based on management's assessment. However, ineffective ICFR reports were generally issued after a restatement was announced, meaning ICFR reports typically didn't serve as predictors of restatements.
Early evidence suggests that critical audit matters (CAMs) do not provide information about restatement risk. The PCAOB began requiring auditors to report CAMs in 2019.
[Journal of Accountancy]
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