Filing incorrect, incomplete or inaccurate forms and financial information is always a concern for public companies filing with the SEC. If it is determined that a public company’s financial statements require adjustment, the company is required to restate these financial statements by reissuing them (“Reissuance Restatement”) or by adjusting the financial information in a periodic report (“Revision Restatement”). Reissuance Restatements typically require more substantial adjustments and are more disruptive to the market. For the purpose of this analysis, Reissuance Restatements will be referred to as “Big R” restatements and Revision Restatements will be referred to as “Little r” restatements.
Recently, Audit Analytics released an article on the topic of “2015 Financial Restatements: A Fifteen-Year Comparison.” Audit Analytics is an on-line public company intelligence service that provides independent research and data related to public filings. The research by Audit Analytics on restatements showed that the total number of restatements and the severity of these restatements have both been trending downward in recent history. The total quantity of restatements in 2015 was 737 (including 516 Little r restatements and 161 Big R restatements), which was a decline of approximately 14% from the prior year and the lowest mark since 2002. The average of 1.57 issues per restatement in 2015 was also lower than the 15-year average of 1.82 issues. The ratio of Little r restatements to total restatements was consistent from 2014 to 2015 at 76.2%, which is the highest ratio since 2005.
Audit Analytics found another interesting trend related to the top issues for restatements. In the last five years, the top two issues have remained the same: Debt, Quasi-Debt, Warrants & Equity Security Issues and Cash Flow Statement. The execution of convertible debt or other debt issues can also lead to the second most common issue of misclassification in the cash flow statement. Therefore, any complex debt instruments, convertible debt instruments with beneficial conversion features or financial derivatives should be of particular concern with public filers.
Although the top two issues have been consistent for the past five years, the prevalence of these issues has also decreased. Overall, Audit Analytics’ research shows recent trends with financial restatements have been positive and indicate that public filers have been more cognizant of key topics and significant issues.
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