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January 27, 2004
Restatements of Annual Filings Continue to Rise
    by William Baue

While restatements of annual filings are still increasing, overall restatements, including quarterlies, are starting to taper off, according a summary report by Huron Consulting.


Revisions of public companies' annual financial statements due to deliberate or accidental accounting errors, otherwise known as "restatements," continued to rise last year, says a summary report released earlier this month by Huron Consulting. According to the report, entitled 2003 Annual Review of Financial Reporting Matters, 206 companies restated their annual filings with the US Securities and Exchange Commission (SEC) in 2003, up from 183 in 2002, 140 in 2001, and 98 in 2000.

Including amendments of quarterly (10Q/A) filings along with this annual (10K/A) filing tally, the overall growth of restatements seems to be tapering off, with this total number (323) decreasing slightly from 2002's total of 330. However, last year's total is still significantly higher than the totals of 270 in 2001, and 233 in 2000, and 216 in 1999.

"Accounting restatements were running along at about 100 per year or so until around the 1996-97 time frame--since then we have seen yearly increases," said Lynn Turner, former chief accountant for the SEC (from 1998 through 2001) and current director of Colorado State University Center for Quality Financial Reporting. "The leveling off in the number of restatements is favorable but still leaves us well above the more normal number of 100 or less."

"And that must be put in the perspective that in August 2002, all chief executive officers and chief financial officers had to start certifying that their financials were correct and their internal controls working," Mr. Turner told SocialFunds.com.

Huron identified the three top reasons for restatements.

"As we have observed in prior years, problems applying accounting rules, human and system errors, and fraudulent behavior are the three primary causes for accounting errors," said Joseph Floyd, chief operating officer for Huron's Financial and Economic Consulting practice.

The category with the most restatements, errors in accounting for reserves and contingencies, also represents the arena most open to deliberate manipulation of information, as it relies on estimates. Reserves and contingencies restatements numbered 68 in 2003, accounting for 17.5 percent of the restatements identified by Huron, while 16.2 percent of restatements resulted from revenue recognition and 15.7 percent from equity revisions.

It is therefore possible that restatements due to fraudulent initial reporting may be on the rise, despite the fact that overall restatements appear to be declining.

"I think there continue to be some levels of deliberate, and quite frankly, arrogant failure to follow basic accounting rules," said Mr. Turner. "HealthSouth is a good example."

In March 2003, the SEC temporarily suspended trading in HealthSouth (ticker: HRC) securities, charging the healthcare services provider with "massive accounting fraud" including overstating its earnings by at least $1.4 billion and its assets by at least $800 million.

"The number one and two causes of problems in the financial statements the last three years have involved companies booking revenues before they should, and improperly adjusting 'cookie jar' type reserves to make the numbers," said Mr. Turner. "Unfortunately, the auditing profession has not responded to requests by the SEC to provide more stringent rules for auditors to follow in trying to unearth these types of problems--hopefully, such guidance will be high on the priority list of the Public Company Accounting Oversight Board [PCAOB]."

The report extends not only previous years' studies by Huron, but also an October 2002 report on restatements conducted by the US General Accounting Office (GAO). The GAO is the audit, evaluation, and investigative arm of Congress. The GAO report found that ten percent of publicly traded companies in the US filed restatements from January 1, 1997 through June 30, 2002, and that restatements increased by 145 percent over that period.

According to the Huron summary report, almost half (49 percent) of the restatements were filed by companies with revenues under $100 million, while a fifth (20 percent) were filed by companies with revenues greater the $1 billion.

Next month, Huron will release the full report, which will not only disclose the statistical findings in more depth, but will also discuss the major events that impacted the financial reporting world in 2003, according to Huron spokesperson Jennifer Frost-Hennagir.

 

 
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