Financial Restatements Continue to Rise
U.S. companies are filing financial restatements admitting false or faulty accounting at a record pace this year, according to a study at New York University’s Stern School of Business.
Restatements almost tripled from 1997 to 2001, and this year’s rate will exceed last year’s total of 158, the study said. Kroger Co., the biggest U.S. grocery chain, home furnishing retailer Restoration Hardware Inc., and Westlake Village-based Homestore.com Inc., the nation’s largest online real estate service, joined Enron Corp. in restating results since January 2001, company filings show.
“This is looking like the year of the restatement,” said Jack Ehnes, chief executive of the California State Teachers Retirement System, which oversees $100 billion in investments. “It’s certainly disturbing for investors who expect financial statements to be accurate.”
Investors and regulators link the increase to the stock market boom of the late 1990s, as companies came under heightened pressure to produce profits and accounting oversight was lax. After the Enron collapse last year, federal officials and auditors are pressuring companies to undo accounting irregularities, regulators say.
“The public’s sensitivity to the risks from financial reporting failures has become extraordinarily heightened,” said Stephen Cutler, enforcement director at the Securities and Exchange Commission. “Each day seems to bring a new restatement, revelation or allegation that calls into doubt the accuracy or completeness of another company’s financial statements.”
Financial Executives International, an organization of corporate financial officers, distributed the NYU study. “Restatements are analogous to plane crashes,” spokesman Christopher Allen said. “They cause a mess when they happen, but they happen infrequently relative to the total number of flights.”
Earlier studies by the SEC and Arthur Andersen found the leading reason why companies restated finances was to correct improperly reported revenue. Examples include counting sales before they were made, booking barter transactions as sales and recognizing sales before services were performed.
The SEC forced half of the restatements in 1999, according to the NYU study. Regulators typically investigate when they get a tip from a company insider.
Some companies voluntarily restate. Others have been pressed to revise results by their auditors, who are under pressure because of the Enron collapse, said J. Richard Dietrich, an accounting professor at Ohio State University.
