An overview of accounting restatement activity in the United States

Abstract

Purpose The purpose of this paper is to provide an overview of financial restatements by US companies to help students, professors, and practitioners gain a better understanding of restatements. Data from restatement activity that occurred between January 1, 1997 and June 30, 2002 is presented and relevant literature is cited to discus the players involved in restatements, the causes of restatements and their impacts. Design/methodology/approach A sample of 919 restatement announcements compiled by the General Accounting Office (GAO) that occurred between January 1, 1997 and June 30, 2002 is analyzed. The data and the relevant literature are used to examine the roles of companies, auditing firms, and the Security and Exchange Commission (SEC) in the financial reporting process and show how they are involved in prompting restatements. Literature is also reviewed on the root causes of restatements and their impact. Findings The misstatements that lead to earnings restatements are driven by a variety of forces, the most often studied and discussed being deceptive accounting practices by managers. The results of these restatements include a decline in the market value of the firm, an increase in the cost of capital, a loss of reputation for the firm and managers and an overall loss of confidence from investors. Key players in restatements by US companies are the Securities and Exchange Commission (SEC), the restating firms' auditors and the management of the restating firms. Restatements prompted by the SEC tend to be larger than those prompted by other entities. They also tend to involve firms with high profitability before the restatement. The Sarbanes‐Oxley act is the latest significant piece of legislation that impacts financial reporting by firms. Research limitations/implications Data on US restatements occurring between January 1, 1997 and June 30, 2002 are presented. Restatements are a continuing, global, phenomenon so studies involving restatements by firms in various countries and from more recent periods would be useful. Practical implications This paper provides a useful overview of restatement activity in the USA for any individual looking to become more familiar with the topic. Ideas for future research are presented. Originality/value This paper fills a hole in the literature by providing data and citing relevant literature to provide an overview of accounting restatement activity in the USA.

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