Financial Restatements Soared in 2005 Thanks to SOX

March 6, 2006 ( - The number of financial restatements by public companies almost doubled in 2005, in part because of stricter requirements governed by the Sarbanes-Oxley Act (SOX) of 2002.

The Wall Street Journal reports that the number of restatements in 2005 was 1,195, compared to 613 in 2004.   “Over time, as companies continue to improve their internal controls, we expect the number of restatements eventually will decline, perhaps as soon as 2006,” San Francisco-based Glass Lewis said in a report to its clients.

Overseas companies that do business in the US also experienced an increase in the number of restatements – from 37 in 2004 to 100 in 2005, Glass Lewis said, according to the WSJ.

Of concern to Glass Lewis were the number of ‘stealth’ restatements – those from companies that did not amend previous financial statements to reflect a restatement; failed to announce the restatement in a standard SEC filing known as an 8-K; and didn’t mention a looming restatement in a notice to investors that it would be late filing annual or quarterly results with regulators.  

According to Glass Lewis data, 14% of all restatements were so-called ‘stealth’ restatements in 2005. Around two-thirds of those were from companies with market capitalizations of less than $75 million, confirming Glass Lewis’ view that regulators should not exempt smaller companies from SOX internal controls rules (See  Letter Urges Regulators not to Implement SOX Exemption).

Of the reasons for financial restatements in 2005, expense-recognition mistakes ranked number one.   Misclassifying accounting items was the second most frequent mistake, followed by equity-related errors, such as improper valuations for stock-based compensation.