Financial restatements among U.S public companies hit their lowest level in years in 2017, according to the latest annual report from Audit Analytics. The total number of restatements declined in 2017 to a 17-year low and the number of reissuance restatements (those requiring withdrawal and reissuance of previously released financial reports) declined for the eleventh consecutive year. The number of companies restating their financials is at its lowest level since at least 2002. The findings are summarized in a June 7, 2018 Audit Analytics blog post (here). The full report can be found here (subscription or purchase required).
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What factors might indicate a likelihood of financial misreporting? There might be markers in companies’ financial statements, for example, with respect to reserving practices or practices with respect to other estimated items. There may be more general indicators as well, as, for example where companies reliably hit their revenue estimates due to a rush of end of reporting period sales. According to a recent academic study, attitudes in the community where businesses are located may also affect companies’ propensity for financial misreporting.

In a May 30, 2017 paper entitled “Gambling Attitudes and Financial Misreporting” (here), Dale Christensen of the University of Oregon, Keith Jones of the University of Kansas, and David Kenchington of Arizona State University, companies headquartered  in areas where residents hold gambling-friendly attitudes are more likely to intentionally misreport financial information. The authors findings were summarized in an August 14, 2017 Wall Street Journal article entitled “A Roll of the Dice on Financial Misreporting” (here).
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calculatorInvestors, analysts, D&O insurance underwriters, and others responsible for identifying risks among public companies may want to pay close attention to the ways that companies report their financial results. According to a recent analysis, companies that make heavy use of non-GAAP reporting – such as tailored figures like “adjusted net income” and “adjusted operating income” – are more likely to encounter some kinds of accounting problems, such a restatements, than companies that stick to standard accounting measures. The research, by consulting firm Audit Analytics, is discussed in an August 3, 2016 Wall  Street Journal article (here), and in an August 4, 2016 post on the Cooley law firm’s PubCo blog (here).
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weilWhile financial fraud has always been an important enforcement target for the SEC, the agency recently has shown increased attention to financial reporting cases. In the following guest post, Robert F. Carangelo, Paul A. Ferrillo and Andrew Cauchi of the Weil Gotshal law firm take a look at the SEC’s recent focus on financial reporting and the particular issues that have drawn the agency’s scrutiny. I would like to thank Rob, Paul and Andrew for their willingness to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ guest post.
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