December 13, 2021

Restatements: “Little r” Determinations Draw Staff Attention

Liz has already blogged a couple of times (here’s the most recent) about Acting Chief Accountant Paul Munter’s statement recapping the OCA’s 2021 activities. For a blogger, this thing is one of those “gifts that keep on giving”, so I’m going to address another issue he raised – “Little r” restatements. Munter noted that Little r restatements have grown from 35% of restatements in 2005 to nearly 76% last year. Since they don’t require companies to restate prior period financials in order to correct an error, it’s easy to understand their popularity.  But that rise in their use seems to have also attracted more attention from the SEC.

The ability to correct an error without a full-blown restatement depends on whether the error is material to the prior period, but Paul Munter cautioned that deciding whether an error is material is not a mechanical process. Instead, “management must judiciously evaluate the total mix of information, taking into consideration both quantitative and qualitative factors to determine whether an error is material to investors and other users.”

Shortly after this statement was issued, Corp Fin’s representatives at the annual AICPA & CIMA conference suggested that qualitative factors aside, some errors are just quantitatively too big to “Little r.”  This excerpt from a Wolters Kluwer blog on the conference explains:

Corp Fin indicated that the guidance in SAB 99, Materiality, remains guidance and requires quantitative and qualitative considerations when determining if something is material to a reasonable investor. Corp Fin discussed two recent accounting error examples in which the division did not agree to the Little r treatment by the particular company. In both cases, Corp Fin asked for SAB 99 considerations and judgments to gauge how the company determined that the particular errors did require Big r restatement and withdrawal of the audit opinion. In the two examples, quantitative factors were significant (i.e., 20% change in net income, 50% change in loss on discontinued operations). However, in the company’s SAB 99 analysis it relied on qualitative factors to overcome these significant quantitative factors. Some of the qualitative factors considered by the company included that the:

– Error generally was isolated to the discontinued operations portion of the financial statements;
– Error was already now corrected since it was revised (not restated).
– The sale was complete;
– The most recent financial statements really are the ones that are most useful to investors.

Corp Fin appreciated the qualitative factors and they are things that it sees generally with SAB 99 analysis. As a result, Corp Fin did not necessarily disagree that these qualitative factors weren’t relevant. However, Corp Fin determined that these qualitative factors were not enough to overcome the magnitude of the quantitative errors.

The blog also says that Corp Fin’s representatives pointed out that a lot of the qualitative considerations raised here were based on the passage of time – in other words, a lot of water has gone under the bridge since the error, and that makes it immaterial.  Not surprisingly, those type of qualitative arguments don’t carry a lot of weight with the Staff.

I think it’s fair to say that when issues surrounding Little r restatement decisions feature in both an Acting Chief Accountant’s statement on current areas of focus & in remarks by Corp Fin representatives at a prominent conference, those issues are front and center with the SEC’s accountants. So, if you’ve got a client that wants to correct an error through a Little r restatement, it’s probably a good idea to tell them that they’d better be loaded for bear – and not just in case the Staff comments on the filing.  With this level of SEC attention, auditors are likely going to require a lot of persuading before they sign off on a Little r restatement.

John Jenkins