Trends in the Reasons for Restatements
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Publisher:The Ohio State University
Series/Report no.:The Ohio State University. Department of Accounting and MIS Honors Theses; 2016
In 2014, more than 500 companies or over 3% of all public companies filed a Form 8-K Item 4.02 disclosure indicating that a previously issued financial statement should not be relied upon due to a material error. These material errors mislead investors, creditors, and other stakeholders. Therefore, such a company is subsequently required to issue corrected financial statements through a Form 10-K/A disclosure. By understanding the underlying errors that drive companies to restate, accountants can take actions to minimize the quantity of restatements. Previous research has examined the relationship between the passage of time and the number of restatements. This study adds to the discussion by describing reasons that companies restate and the associated trends. Audit Analytics database provided by Wharton Research Data Services was used to analyze all Item 4.02 disclosures from 2004 to 2014. These restatements were classified by whether clerical error, fraud, accounting error, or another type of error led the company to restate their financials. The results indicate that the proportion of restatements explained by clerical errors has fallen from over 14% in 2008 to about 1% in 2014. The proportion of restatements explained by fraud has fallen from over 3% in 2004 to under 1% in 2014. As a result, the proportion of restatements explained by accounting errors has increased from about 86% in 2008 to over 98% in 2014. These results are consistent with the presumption that increased regulation, technology, and education may reduce fraud and clerical error over time. The total number of restatements has more than doubled since 2008 despite evident decreases in the proportion of restatements explained by clerical error and fraud. As the proportion of restatements explained by accounting errors predominates, actions must be taken to reduce accounting error and consequently diminish the total number of restatements.
Academic Major: Accounting