The following article is from the BNA Tax & Accounting's Accounting Policy & Practice Report. To see the full report and take a trial to the BNA Tax and Accounting Center, visit this site.
(This article was published April 18 in Accounting Policy & Practice Report and is reproduced with permission.)
Financial report restatements began increasing "significantly" before the advent of the 2002 Sarbanes-Oxley Act, but the adverse market reaction from misstating financial information has dwindled, even as the number of restatements was growing, Assistant Treasury Secretary David Nason said April 9.
Nason released results of a Treasury-commissioned study on financial restatements, which was undertaken as part of the department's initiative to analyze and improve the competitiveness of U.S. capital markets.
The study, conducted by University of Kansas accounting professor Susan Scholz, came to many of the same conclusions as other restatement studies, but covered the 1997-2006 period, while others have covered the 2001 or 2002-2007 time frame.
Scholz's study found that restatements grew to 1,577 in 2006 from 90 in 1997, with an acceleration beginning in 2001, the year before the Sarbanes-Oxley Act.
"There seems to be an inverse relationship occurring between the restatements and the [market] reaction," Nason told reporters. "While there was a rapid increase in the overall amount of restatements, the marketplace reaction ... is demonstrably less."
The exception is restatements arising from fraud, which always caused a negative market reaction, Nason said.
While the overall number of restatements resulting from fraud and abuse rose over the period of the study, the proportion of restatements attributable to fraud and abuse declined, from 29 percent in 1997 to 2 percent in 2006, the study said.
Findings Shared With SEC.
Nason refused to discuss the policy implications of the study, saying its findings would be shared with the Securities and Exchange Commission's Advisory Committee on Improvements to Financial Reporting, and Treasury's own Advisory Committee on the Auditing Profession. It would be up to those groups to make any policy recommendations, Nason said. The findings "will be part of the debate" in those bodies' deliberations, he said.
A concern among some companies and the SEC financial-reporting panel is that many companies are filing restatements for nonmaterial errors. The SEC panel is considering recommending that, while all mistakes should be corrected in the reporting period immediately after they occur, nonmaterial errors need not lead to restatements.
Scholz's study did not state directly whether a large number of restatements have been filed for nonmaterial errors, but it did note that the SEC's 1999 Staff Accounting Bulletin 99, Materiality, "may have led to an increase in restatements if it caused companies and auditors to begin formally restating errors that otherwise did not meet assessed quantitative materiality thresholds."
Michael Ryan, executive director of the U.S. Chamber Center for Capital Markets Competitiveness and a Chamber vice president, told BNA that if "so many restatements are not causing a [market reaction], it says something about the materiality standard." He said that the study is independent data and a second check on whether they [SEC panel] should be concerned" about filing restatements for nonmaterial reasons. "And they are concerned, because for a company to engage in a restatement, it's a costly process," and thereby potentially harms U.S. capital market competitiveness, Ryan said.
The restatement study is at http://www.treas.gov/press/releases/reports/FinancialRestatements_1997_2006.pdf
The following article is from the BNA Tax & Accounting's Accounting Policy & Practice Report. To see the full report and take a trial to the BNA Tax and Accounting Center, visit this site. |
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