Restatements take another turn for the better, Audit Analytics says

Financial restatements trends took another downward turn in 2015, suggesting an incremental improvement in the quality of financial reporting, according to the latest data from Audit Analytics.

The total number of restatements that were serious enough to undermine reliance on prior financials fell to 161, the lowest level since the 2006 spike following the enactment of Sarbanes-Oxley. Even revision restatements, or those that do not undermine reliance, fell in 2015 to 516 from 605 the year before. Combining both types of restatements, the overall number of restatements dropped 12.7 percent in 2015 from the year before, the firm’s latest annual report says.

The analysis by Audit Analytics suggests restatements leveled off from about 2009 to 2014, when the total number of both material and immaterial restatements hovered in the mid-800s, from 834 to 871. The most recent year represents a meaningful drop in the total numbers, falling below 800 for the first time.

Restatements among accelerated filers, whose restatement numbers inched upward the five prior years, also tapered off in 2015, dropping to 264 from 353 the year before. Accelerated filer restatements hit their lowest mark in the Sarbanes-Oxley era after declining for five consecutive years.

Don Whalen, director of research and general counsel at Audit Analytics, says he attributes the improved restatement trends to an intense regulatory focus in the past few years on internal control over financial reporting, especially through the audit inspection process at the Public Company Accounting Oversight Board. The PCAOB has flagged audit deficiencies in internal control more than any other audit failure in the past few years of inspections. Companies also implemented a new COSO internal control framework during the same time period.

“That has led to an increase in the effectiveness of internal control,” says Whalen. “If the auditor is being a little more attentive, then management has to be more attentive too. It’s causing another wave of improvement over ICFR.”

While the overall volume of restatements has diminished, so has the severity of restatements by several different indicators, the research report shows. The one-off, epic restatements are not so flabbergasting any more. It’s been more than a decade since Fannie Mae and AIG rocked markets with restatements in the range of $6.3 billion and $5.2 billion. Telecom Italia’s $7.17 million restatement in 2015 garnered much less attention by comparison.

The number of days that it takes to issue a restatement fell to 3.22 in 2015, the lowest level of the past decade. That’s an indicator mistakes are not as serious or are easier to correct, the report says. The average restatement period fell to 498 days, the second year of decline, and the average number of issues that led to restatement also fell to 1.57 in 2015 from 1.72 in 2014.

Debt and debt-related accounting errors continue to cause the highest number of restatements, cropping up 161 times in 2015 restatements, followed closely by errors in the cash flow statement, which occurred 123 times. Tax expense was a close third with 94 occurrences. 

“All in all, its is good news,” says Whalen. “The numbers are going down, and the severity is going down. Even if you do end up having to make an adjustment, it tends to be less severe and easier to fix, which is what we’re seeing. If you have better internal controls, you’re going to expect to see this.”