The decline noted in 2003 ended a five-year trend for financial restatement increases. Even with the dip though, the number of restatements is still higher than the 270 in 2001 and 233 in 2000 , research from the Huron Consulting Group revealed.
“The number of accounting errors identified in 2003, though certainly not a cause for celebration, may indicate that we have put the worst restatement period behind us and can expect to see further improvements in the years ahead,” Joseph Floyd, chief operating officer for Huron’s Financial and Economic Consulting practice said in a news release.
Annual statements got particular scrutiny in 2003. The number of restated audited annual financial statements rose to a record high of 206, representing 63% of the total filed during the year and an increase of 23 audited annual restatements, or 13%, from 2002 (See Corporate Restatements Up in ’02 ).
Huron’s study focused on restatements of both quarterly (10Q) and annual (10K) financial statements that had been previously filed with the US Securities and Exchange Commission (SEC). The study is then broken down by company size and industries.
2003 Major Boo-Boos
Huron says 2003’s numbers were significantly impacted by errors in accounting for reserves and contingencies. This category includes accounting errors related to accounts receivable and inventory reserves, restructuring reserves, accruals, and other loss contingencies.
This may not come as a surprise given that reserves and contingencies are among the most judgmental accounts in a company’s financial statements as they are subject to an estimation process. These restatements, however, do not simply reflect changes in estimates, but rather reflect flawed judgments due to the oversight or misuse of facts, fraud, or a misapplication of Generally Accepted Accounting Principals (GAAP), Huron concluded.
Also a major player in 2003’s error sheet was revenue recognition gaffes, instances where a company improperly recognizes revenue of transactions. However, even though this category accounted for the second most restatements, the 63 revenue recognition related restatements identified in 2003 represent a 26% decrease from 2002 when revenue recognition restatements reached an all time high.
By company size, the number of restatements by companies with annual revenues under $100 million rose to 158, nearly half (49%) of all restatements filed during the year. The percentage of restatements filed by companies with annual revenues greater than $1 billion decreased slightly in 2003, representing only one out of five restatements in 2003, from 22% in 2002.
The full report, 2003 Annual Review of Financial Reporting Matters, will be available in early February at www.huronconsultinggroup.com .