Financial restatements among U.S public companies hit their lowest level in years in 2016, according to the updated annual report of Audit Analytics. As a result of heightened standards as well as the decreased numbers of listed companies, the share U.S. companies restating their prior financial statements hit their lowest level since 2010 and the number of companies restating their financials is at its lowest level since at least 2002. The findings are summarized in a June 12, 2017 Audit Analytics blog post (here). The full report can be found here (subscription or purchase required).
According to the blog post, during 2016 615 filers reported 671 restatements in 2016, down from 684 filers reporting 756 restatements in 2015. The year over year decline in the number of filers reporting restatements represents the fourth consecutive year in which the number of filers reporting restatements declined compared to the prior year. The number of filers reporting restatements and the number of restatements reported are both at the lowest levels for both since at least 2002.
The numbers of restatements in recent years have been well below the elevated levels seen during the high water marks in 2005 and 2006, when the elevated reporting requirements of the Sarbanes Oxley Act began to bite. For example, in 2006, 1624 issuers reported 1853 restatements. The number of companies reporting restatements and the number of restatements have shown a more or less steady decline since that time.
The share of U.S. companies reporting restatements has also declined. According to Audit Analytics, 6.8% of all reporting companies reported restatements, the lower level since 2010, as discussed in greater detail in a June 7, 2017 Wall Street Journal CFO Journal blog post about the report (here).
The Audit Analytics report sorts restatements into two categories, Reissuance Restatements and Revision Restatements. Reissuance Restatements address a material error that calls for reissuance of a past financial statement. Revision Restatements deal with immaterial misstatements or adjustments made in the normal course of business. As the blog post notes, “Because revision restatements are less severe, they are generally not looked at as a sign of poor reporting. However, some would argue that the disclosure of revision restatements shows a level of transparency and honesty by the filer.”
The number of Reissuance Restatements and the percentage of all restatements that are Reissuance Restatements has declined steadily since the middle of the last decade. There were a record low 130 Reissuance Restatements in 2016, far below the 941 Reissuance Restatements in 2006.
At the same time, Revision Restatements as a percentage of all restatements has increased. As a result, as the numbers of restatements overall has declined, the percentage of all restatements that are the less-serious Revision Restatement has grown. In 2016, Revision Restatements represented 78.3% of all restatements in 2016. While there were just 130 Reissuance Restatements in 2016, there were 470 Revision Restatements.
The number of Reissuance Restatements from accelerated filers (that is, listed companies with market capitalizations about specified thresholds) declined in 2016. Just 51 accelerated filers filed disclosed Reissuance Restatements in 2016, representing just 1.5% of accelerated filers.
One factor that has affected the overall numbers of restatements has been the decline in the number of U.S. listed companies. Just in the last decade alone, the number of U.S. listed companies has declined by 37%. With fewer companies reporting, the number of companies revising their prior financial statements has also declined.
Overall, the report notes, not only are restatements on the decline, but the restatements that are arising “more often than not lack severity or material weakness.” The increase in Revision Restatements over Reissuance Restatements “indicates more transparency and better quality disclosures.”
The decline in the number and rate of restatements may be attributable to tighter regulation, particularly the heightened financial reporting controls required by the Sarbanes-Oxley Act. The Act requires public companies to have their outside auditor review their internal control systems and the processes that the company has in place to prevent financial fraud. The Journal article to which I linked above quotes Don Whelan, the director of research for Auditor Analytics as saying that “Any improvement in the internal controls over financial reporting is going to reduce the likelihood of a financial restatement. And if [a weakness] does happen, it’s going to be found more quickly and have less impact.”