TheCorporateCounsel.net

Ideagen/Audit Analytics recently released its annual study of financial restatements.  The study provides data on restatements from 2004 through 2023, and the topics addressed include the number of Big R & Little r restatements, the average length of the restatement period, the impact of restatements on previously reported income, the filer status of companies that have restated results, and a breakdown of restatements by industry.  Here are some of the highlights from the study’s discussion of the type of accounting errors that have prompted restatements:

– Seven of the top 10 most common issues cited in restatements since 2004 can also be seen in the top 10 issues for 2023. Inventory, vendor and cost of sale issues as well as consolidation issues, appear as top issues for 2023 but not for the 20-year period. Consolidation issues in 2023 included joint ventures, non-controlling interests, variable interest entities and foreign exchange translations.

– Overall, issues related to debt and/or equity accounts continue to be the most common accounting issues cited in financial restatements. This issue was tagged in 27% of all restatements since 2004, totaling 4,624 restatements. It’s notable that the SPACs alone have contributed to almost 1,100 of these citations over the years.

– Debt and equity securities continues to be the most common restatement issue, constituting 21% of all issues in 2023. In 2021, the debt and equity securities issue was associated with 81% of all restatements, largely due to the SPAC boom. This massive spike in debt and equity securities consequently created sharp declines for the remaining issues.

– Since 2021, revenue recognition, expense recording, liabilities and accruals and cash flow classifications issues have all rebounded from 2-3% to 10-16% in 2023.

The study notes that even after excluding the impact of the SPAC warrant mess, debt and equity issues have occurred more frequently than any other issue in restatements over the past 20 years. Debt and equity issues accounted for 35% of all Big R restatements from 2004-2023, while revenue recognition (15%), M&A issues (12%), deferred, stock-based and/or executive comp (11%) and liabilities, payables, reserves and accrual estimates (11%) round out the top five reasons for Big R restatements.

– John Jenkins