According to a recent Audit Analytics report, 2020 saw the lowest percentage of financial restatement disclosures (Big R & Little r) in the 20 years that Audit Analytics has been monitoring those disclosures. The report says that restatements have been declining for each of the past six years. In 2020, just 4.9% of companies restated previous financial statements, compared to 6.8% in 2019 and 17.0% at the peak in 2006. This excerpt discusses the most common reasons for restatements last year:
Revenue recognition was the most frequently cited issue in financial restatements for the third year in a row. Coinciding with the new revenue recognition standard that became effective in 2018, revenue recognition supplanted debt and equity securities issues as the most frequently cited issue in financial restatements.
The second most frequently cited issue of 2019 – cash flow classification – fell outside the top five in 2020. Cash flow classification had been a top-five issue every year since 2008. This was replaced by general expense recognition, which returned to the top five for the first time since 2016.
Debt and equity securities, liability and accrual recognition, and tax matters round out the top five most frequently cited issues in 2020’s financial restatements. Debt and equity securities and tax matters have each been among the top five issues for at least the past decade. Liability and accrual recognition has been among the top five since 2017.
The report includes a bunch of other details about 2020 restatements, included the mix between reissuance (Big R) and revision (Little r) restatements, the average length of time required to restate financials and the average days restated. It’s pretty much a sure thing that next year’s report is going to look very different from this year’s – as a result of the multiple rounds of SPAC restatements occurring this year, Audit Analytics expects a record number of disclosed restatements in 2021.
– John Jenkins