Updated US GAO study on financial statement restatements

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07 Aug 2006

The United States Government Accountability Office has updated its 2002 study of financial statement restatements in the USA.

In 2002, GAO reported that the number of restatement announcements due to financial reporting fraud and/or accounting errors grew significantly between January 1997 and June 2002, negatively impacting the restating companies' market capitalisation by billions of dollars. The US Congress recently asked the GAO to update key aspects of its 2002 report. The 2006 report discusses (a) the number of, reasons for, and other trends in restatements; (b) the impact of restatement announcements on the restating companies' stock prices and what is known about investors' confidence in US capital markets; and (c) regulatory enforcement actions involving accounting and audit issues. Click for:

Selected Findings of the GAO 2006 Restatements Study
  • The number of annual announcements of financial restatements generally increased, from 314 in 2002 (3.7% of companies listed on NYSE, NASDAQ, and Amex) to 523 in 2005 through September (6.8% of listed companies). This constituted a nearly five-fold increase from 92 in 1997 to 523 in 2005.
  • From July 2002 through September 2005, a total of 1,121 public companies made 1,390 restatement announcements. Industry observers noted that increased restatements were an expected byproduct of the greater focus on the quality of financial reporting by company management, audit committees, external auditors, and regulators.
  • Cost- or expense-related reasons (including lease and tax accounting issues) accounted for 35% of the restatements, followed in frequency by revenue recognition issues.
  • Most restatements (58%) were prompted by an internal party such as management or internal auditors.
  • In the wake of increased restatements, the SEC standardised its disclosure requirements by requiring companies to file a specific item on the Form 8-K when a company's previously-reported financial statements should no longer be relied upon. However, between August 2004 and September 2005, about 17% of the companies GAO identified as restating did not appear to file the proper disclosure when they announced their intention to restate. These companies continued to announce intentions to restate previous financial statements results in a variety of other formats.
  • The market capitalisation of companies announcing restatements between July 2002 and September 2005 decreased $63 billion when adjusted for market movements ($43 billion unadjusted) in the days around the initial restatement announcement. This represented about 0.4% of the market capitalisation of the major exchanges, which was $17 trillion in 2005.

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