That was the conclusion of a General Accounting Office study of companies restating their financial results between January 1997 and June 2002.
One aspect of the current firestorm of controversy centering on debacles at Enron, WorldCom and other companies has been the wave of firms that have announced publicly that they had been forced to go back and correct earlier financial reports in order to comply with reporting regulations for public companies.
The GAO’s findings in the current report included:
- financial restatements have been and will continue to be a growing problem. The GAO said such restatements increased by 145% between January 1997 and June 2002. By year end 2002, the GAO expects the increase to be more than 170%.
- companies doing the restating are getting bigger. The average market cap of restating companies jumped from $500 million in 1997 to $2 billion this year.
- during the 1997 to 2002 period studied, restatements to more accurately recognize revenue previously misreported or unreported represented almost four in 10 of the restatements
- the restating companies during the study period lost an estimated $100 billion in market capitalization just before and right after their restatement announcement
- a fifth of all US Securities and Exchange Commission (SEC) enforcement cases were for financial reporting and accounting issues. About half of those were for violations of rules for recognizing revenue.
“The recent increase in the number and size of financial statement restatements and the disclosures of accounting issues and irregularities underlying these restatements have raised significant questions about the adequacy of the current system of corporate governance and financial disclosure oversight,” GAO officials wrote in their report.
The GAO said Sarbanes-Oxley helped the situation somewhat by strengthening corporate governance and improving transparency and accountability. The legislation also increased the SEC’s budget.
But there is much more left to be done, the GAO said. To build on the new legislation’s provisions, the GAO said:
- “highly qualified individuals” who believe in the need for reform need to be appointed to the new federal accounting oversight board
- the new board must provide ongoing input to the accounting profession
- the board has to ensure that meaningful audit standards are put in place
- the board has to punish wrongdoers appropriately.
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