Report: SPACs drive restatement surge in 2021

The review, published last week, examined public company restatement trends from 2001 through 2021. Including SPACs, 1,470 companies filed restatements in 2021, a 289 percent increase from 2020. The report found 12.7 percent of public companies restated their financial statements in 2021, compared to 4.8 percent in 2020 and 13.6 percent at the highest point in 2006.

Excluding SPACs, restatements declined by 10 percent, and the number of individual companies disclosing restatements declined by 15 percent. The study attributed the continued decline in non-SPAC restatements observed in each of the past seven years to both improved reporting and a drop in the number of Securities and Exchange Commission registrants.

Company size: Large accelerated U.S. filers accounted for 10.2 percent of restatements analyzed in 2021, compared with 22 percent in 2020. Accelerated U.S. filers accounted for 4.5 percent—a decrease from 20.6 percent in 2020 and the lowest level since 2003.

In contrast, non-accelerated U.S. filers represented 73.1 percent of restatements in 2021—an increase from 40.7 percent in 2020 and the highest percentage since 2008.

Restatement issues: The most frequent accounting area of restatement in 2021, excluding SPAC-centered restatements for redeemable shares and warrants, was debt and equity securities at 19.1 percent, up from 14.3 percent in 2020. This was the first time since 2018 revenue recognition did not top the list (12 percent in 2021, compared with 17.3 percent in 2020).

Other frequent areas for restatement in 2021 were liabilities and accruals (11.7 percent), general expenses (10.9 percent), tax matters (8.8 percent), cash flows (7.3 percent), and share-based compensation and acquisitions and divestitures (each at 7.0 percent).

Impact on net income: The average negative impact of restatements on net income in 2021 was $6.6 million, with 26 percent of restatements having a negative impact (32 percent excluding SPACs).

Severity: To evaluate the complexity of the restatements, the report looked at several statistics, with higher numbers suggesting greater severity.

• The average number of issues per restatement was 1.85 in 2021 (1.4 excluding SPACs), compared with 1.52 in 2020. The highest average number noted in the report was 2.46 in 2005.
• The percentage of restatements of financial statements included in annual reports, which require an audit of the restated financial statements, was 33 percent in 2021, compared with 58 percent in 2020. This level was the lowest in the 21 years analyzed. However, excluding SPACs, the 2021 result was 61 percent, which was more in line with the outcomes for 2018-20.
• The average number of days to file a restatement in 2021 declined to approximately seven (26 days excluding SPACs), down from 37 days in 2020. There had been year-over-year increases in the average days from 2016-19.
• The average number of days in the 2021 restatement period declined to 288 but stayed relatively flat at 441 compared with 2020 (460) when excluding SPACs. The finding represents the fifth year of decline.

Restatement method: The study noted the proportion of restatements made by revision (correcting errors by revising previous periods in the current year’s financial report) for domestic filers, excluding SPACs, aligned with the levels recorded since 2014 at approximately 76 percent for 2021 (79 percent in 2020). Reissuance restatements, excluding SPACs, were at 24 percent for 2021, a 3 percent increase from 2020.

The proportion of reissuance restatements has hovered around one-fifth of all restatements since 2014. But in 2021, reissuance restatements to correct a material error accounted for one-quarter (24 percent) of all restatements.

The general trend for the study period for domestic filers was an overall decline in the percentage of reissuance restatements and a general overall increase in the percentage of revision restatements. Including SPAC restatements in 2021, the overall reissuance restatement percentage was 62 percent.