Audit Analytics reviews financial restatements in 2017

Audit Analytics has published its annual review of financial restatements, which this year covered a 17-year period. 

The review showed a double-digit percentage decline in the total number of restatements for the last three years in a row, resulting in a new 17-year low of 553 total restatements. Compare that to 1,859 restatements in 2006!  As discussed in this article in Compliance Week, the percentage decline was 19% in 2017, 10% in 2016 and almost 12% in 2015. Stepping back, what the data shows is that, following SOX, the number of restatements skyrocketed, as the new act imposed “new discipline to the financial reporting process through its requirement to report on the effectiveness of internal control over financial reporting.” But by 2007, companies seemed to have gained a better handle on the demands of SOX, as the numbers of restatements began to decline.


In the last couple of years, mandatory SOX 404(b) auditor attestations have come under assault, especially for smaller companies (see this PubCo post and this PubCo post), including through a number of legislative efforts (see this PubCo postthis PubCo post and this PubCo post).  Some have urged that internal control attestation audits are time-consuming and expensive for smaller companies, diverting capital fr om other more important uses such as R&D. But others have pointed to a GAO study showing that companies exempt from controls audits had more restatements. In addition, another study showed that companies that had controls audits had higher valuation premiums and lower cost of debt. A study by academics in Texas analyzed whether the strength of internal control significantly affects fraud risk. The result: the data showed “a statistically and economically significant association” between reports of a material weakness and disclosure of fraud within the three years after reporting the weakness compared to companies without a material weakness.  The data led the authors to conclude that “control opinions that do cite material weaknesses provide a meaningful signal of increased fraud risk.”  (See this PubCo post.)

The review distinguishes between reissuance restatements (meaning that, as the title suggests, the financials are withdrawn and cannot be relied on—necessitating the filing of an 8-K—and new financials are issued) and revision restatements (wh ere the errors are just corrected and explanatory notes included).  It’s not hard to guess which type of restatement is preferred by most companies; not surprisingly, the report indicates that around 77% of restatements were of the “revision” persuasion.  Reissuance restatements have declined each year for the past 10 years, with the number falling to 109 in 2017, from 128 in 2016 and 152 in 2015. Now if you were a cynic, you might think that companies have just been more successful in persuading their auditors of the appropriateness of revision restatements and that the number of revision restatements might have gone up as a result. Not the case—the number of revision restatements has also declined, down to 370 in 2017, from 467 in 2016 and 522 in 2015. According to the article, the number of revision restatements did tiptoe up from 2009 to 2014, but then decreased over the next three years.

Which area was most prone to restatement-level errors in 2017?  Apparently, it was accounting for debt and quasi-debt instruments, which was the subject of over 15% of all restatements. In addition, according to the article, 54% of 2017 restatements had no effect on net income, compared with 59% in 2016. The average number of days restated has also decreased over time—although not consistently—from 737 days in 2005 to 541 in 2016 and 509 in 2017.

With regard to which categories of companies disclosed the most restatements, the report indicates that accelerated filers filed 184 restatements in 2017, a significant improvement from 2014, when accelerated filers disclosed 351 restatements.  By comparison, non-accelerated filers filed 236 restatements in 2017.