Saturday, March 22, 2008

Study evaluates the causes of restatements, with interesting conclusions.

An interesting new study evaluates the causes of financial statement restatements: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1104189. If I read the report correctly, the study supports a conclusion that fraud (manipulation) is not one of the major causes of restatement. The major causes are "internal error" (basic internal company errors unrelated to the accounting standards) at 57%, and "standards" (most often due to the lack of clarity in applying the standards and/or the proliferation of the literature due to the lack of clarity in the original standard) at 37%. Restatement due to "manipulation" and "complexity" are ranked at only 3% each. Of course, "internal error" and "standards" both could be due to manipulation. The study also does not evaluate the percent of restatement caused by other factors that could be present, such as inadequate internal control.

I also found the percent of account type resulting in restatement to be interesting. The study lists the largest contributors as "expense" at 21%, "equity" at 19%, "misclassifications" at 16%, "revenue recognition" at 10%, and "acquisitions/investments" at 8%. I would have expected "revenue recognition" to be in line with "expense."

Dave Tate
http://davidtate.us/ (click on the updated audit committee guide link)
tateatty@yahoo.com