As reported by the CFO Journal of The Wall Street Journal on November 4th, 2014, Restatements Fall on Improved Internal Controls as companies and their auditors appear to have a better handle on how to avoid major restatements.
Some snippets from the article follow.
“Still, almost 1 in 4 restatements this year came with the warning that prior financial statements might not be valid, according to data and research firm Audit Analytics. While striking, that’s down from more than two-thirds in 2005, the first full year that companies were required to make such disclosures under the Sarbanes-Oxley financial overhaul.”
“But companies have put more focus on their internal controls, plus they have better financial-reporting software and information technology. “We’re seeing people finding mistakes more quickly,” said Don Whalen, director of research at Audit Analytics. So, the errors have less repercussion on prior financial results, he added.”
“Total restatements among companies reporting to the SEC have more than halved since a 2006 peak of nearly 1,850, but the number has plateaued over the past six years.”
The Good News! Internal auditors and management have yet another source of anecdotal evidence of the vital importance of internal controls which of course apply in any organization, public or private.
The Not So Good News – more work remains to be done. When 1 in 4 restatements come with a warning that prior financial statements might not be valid and even though that is down more than two-thirds since 2005, 1 in 4 is still simply too high. While there are a number of reasons why financial restatements occur, the simple fact of the matter is with proper internal controls designed and operating effectively at the correct level of precision, financial restatements should be dramatically reduced.