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.
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
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
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.