Academic research commissioned by the Center for Audit Quality finds that the number of restatements of financial statements filed with the SEC has dropped significantly since the implementation of the Sarbanes-Oxley Act (SOX). The study, Financial Restatement Trends in the United States: 2003-2012, by Professor Susan Scholz of the University of Kansas, examines restatements during the ten years from 2003 to 2012.
Some of the study’s conclusions include –
Restatement announcements peaked at 1,784 in 2006, soon after implementation of SOX Section 404 internal control reporting, and then declined rapidly. In 2009, 711 restatements were announced, and remained near that level through 2012.
The severity of restatements also decreased following SOX implementation. For example –
o The average number of accounting issues underlying each restatement declined after 2005. Multiple issues were reported for 70 percent of restatements in 2005, but for only 28 percent in 2012.
o Fewer restatements in later years involved revenue recognition and accounting for on-going business expenses. Restatements involving these core earnings accounts decreased from 65 percent of restatements announced in 2005 to 41 percent in 2012.
o Restatement periods became shorter. The average time period corrected by a restatement declined from more than two years in 2005 to less than a year and a half in 2012.
o Fewer restatements reduced previously reported income. The percentage of restatements that resulted in a decrease in income fell from 61 percent in 2005 to 36 percent in 2012.
The size of companies announcing restatements became smaller. From 2003 to 2006, restatement companies were similar in size to the average public company, In subsequent years, restatement companies were “markedly smaller, except in 2012 when a relatively high percentage of restatements were announced by large financial institutions.”
About 2 percent of companies that had received a clean opinion on their internal controls subsequently announced a restatement of their annual financial statements. Effective ICFR reports associated with restatements decreased from 6 percent in 2006 to about 1 percent from 2009 through 2012.
Comment: This study seems to provide strong support for the proposition that the internal control management reporting and auditing
8 Update │ August 2014
requirements of SOX have improved financial reporting, as measured by the frequency with which previously-issued financial statements are restated and by restatement severity. During the period studied, company perceptions of when a restatement is required may also have changed somewhat. Still, it is hard to escape the conclusion that SOX has made a positive difference in the reliability of public company financial reporting. A more unsettled question is how these benefits of SOX compare to its costs.