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Thursday, January 20, 2005

Restatements Up 28 Percent in 2004

The number of restatements to companies' financial reports spiked by 28 percent last year, according to a study to be released today by Huron Consulting Group Inc.

Researchers attributed the record 414 restatements, up from 323 in 2003, to problems uncovered in reviews of financial systems mandated by the 2002 Sarbanes-Oxley Act and to tighter oversight from regulators after recent accounting scandals cost investors billions of dollars.

"An unprecedented period of scrutiny is bringing these problems to light," Joseph J. Floyd, the leader of the disputes and investigations unit at the Chicago consulting firm, said in an interview.
"It's almost a cleansing of the system."

Within the overall totals, which include revisions to quarterly results, restatements of corporate annual financial statements also increased. Restatements of those annual reports, which are audited by independent accountants and thus are supposed to be less vulnerable to error, rose to 253 from 206 in 2003, Huron officials said.

The Huron study comes as companies and the accountants who review their books are operating under heightened pressure. The Securities and Exchange Commission and the Public Company Accounting Oversight Board have hired scores of accountants and lawyers to examine corporate financial reports and auditors' work papers since Congress passed the 2002 legislation.

Meanwhile, trade groups are mounting fierce appeals to regulators, seeking to loosen costly new Sarbanes-Oxley rules which require them to assess the strength of their financial controls.
Following the rules, known as internal control reviews, has cost some companies an average of $5.1 million apiece, according to a study last year by executive recruiting firm Korn/Ferry International Inc. General Electric Co. said the review cost it $30 million in 2003 alone.

But industry experts said the Huron study of restatements highlights the importance of internal control checks. More than 580 companies announced that they uncovered weaknesses or deficiencies in their internal controls last year, according to the newsletter Compliance Week.

"It goes hand in hand," said former SEC chief accountant Lynn E. Turner in an e-mail. "If you don't have good internal controls, it is not surprising you get a lousy outcome in the form of lousy numbers. That is why Congress passed [the law]."

Companies frequently uncovered problems in training for finance and accounting workers, and many more disclosed trouble with such basic steps as closing accounts.

Large companies are required to file the internal controls reports on rolling deadlines that began Nov. 15. The SEC granted about 2,000 of those firms a 45-day delay last year. Smaller firms and foreign companies trading on U.S. exchanges must begin complying in July.

The Huron study found that a significant portion of the companies restating results last year had encountered financial trouble in the past. About 15 percent of the restatements in 2004 were made by "repeat" filers -- companies that had previously reported incorrect financial information at least once since 1997.

The leading reasons for restatements did not change, Floyd said, citing problems with applying accounting rules, human errors and ethical faults in corporate managers. Companies were most likely to run afoul of the rules that explain when to record revenue and how to handle cash reserve accounts.

Accounting experts pointed out that restatement data lag behind trends in the market, since studies track when companies actually file financial information with regulators, not when they initially announce bookkeeping problems. Many of the restatements filed last year involved earlier periods dating back as many as three years.

"On one hand, one might think that things are getting worse because we're seeing an increase and not a reduction in restatements," Charles W. Mulford, an accounting professor at the Georgia Institute of Technology, said in an e-mail. "I think that it's only a matter of time before what might be viewed as a backlog of restatements gets worked off and the . . . regulatory environment leads to a decline in restatements."

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