One way to broadly gauge the overall quality of financial reporting and auditing is to look at the prevalence of restatements by publicly held companies. By that measure, U.S. companies have generally improved over the last decade, according to a new report from the Center for Audit Quality (CAQ).
The report addresses data provided by Audit Analytics for 2013 through 2022. The peak number of restatements during the 10-year period was 858 in the first year. By the final year, it had more than halved, to 402.
However, a slightly deeper look into the data suggests a trend possibly stirring in the opposite direction.
First, the 2022 figure was 11% higher than the previous year’s 362 restatements.
Second, 2022 featured a spike of the so-called “Big R” variety (i.e., they are disclosed in Form 8-K, Item 4.02), made because previously filed financial reports were deemed unreliable by the company or its auditors. There were 153 of those in 2022, compared with 91 in 2021, although that was still far superior to 2013, when there were 240.
(A majority of restatements are non-4.02 ones, many of which result from “a series of multiple-year errors that result in a cumulative error that is material to the current period.” However, amended filings for the previous years are not required for those; rather, the resulting restatement may be made in subsequent, regularly scheduled financial statements.)
Third, the proportion of total restatements that were Big Rs leaped to 38% in 2022, from 25% in 2021, beating 2013 by 10 percentage points. Additionally, it was the third straight year of increases in the percentage of Big Rs increased.
However, CAQ was reluctant to form long-term conclusions. “It is too early to tell if the increase in restatements toward the end of the sample period is a true inflection point or simply a brief disruption of the previous downward trend,” CAQ wrote in the report.
CAQ said the big 2022 increase in 4.02 restatements could be associated with a note issued that year by Paul Munter, then the SEC’s acting chief accountant. Noting the high proportion of non-4.02 restatements, Munter said that “some materiality analyses appear to be biased toward supporting an outcome that an error is not material to previously issued financial statements.”
On the plus side, while the length of restated periods averaged 1.44 years during the entire 10-year sample period, over the decade it declined to a low of 1.05 years.
Looking at restatements by industry, over the 10 years four industries each accounted for more than 10% of all restatements: financial/banking/insurance (17%), healthcare and pharma (14%), computer/software (14%), and energy/mining/chemicals (11%). The fewest restatements were in the utilities/waste and telecom/broadcast sectors (3% each).