While reviewing the results of our recent annual report on financial restatements, we noticed an interesting – although not unexpected – trend. Restatements are most commonly disclosed in the spring.
A look through 8-K Item 4.02 Non-Reliance disclosures filed between Nov. 1, 2011, and Dec. 31, 2015, show that 47 percent of them were filed between February and May. The data suggests what one might have guessed -- that the majority of material errors are found during the year-end close process.
We know that company management often plays an active role in the discovery of accounting issues during the internal review of specific transactions or areas of accounting. Auditors, too, can uncover misstatements during their year-end or quarter-end audit and reviews. Given that, it makes sense that financial restatements are most frequently disclosed in the spring, when companies are preparing their annual reports and auditors are performing the bulk of their field work.
A look through our databases shows that other sources can help uncover material misstatements as well. In particular, questions and reviews by the SEC and PCAOB sometimes reveal accounting issues.
During the review process of the registrant, the SEC issues comment letters to address areas of concern. Similarly, but less frequently, the PCAOB can also identify accounting issues during their inspections of audit firms.
The data shows another spike in restatement disclosures in November, along with another smaller spike in August. Those are likely tied to quarterly reviews, but perhaps further investigation would be warranted.
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