US Treasury Secretary, Henry Paulson on Wednesday announced the completion of a Treasury-commissioned study, 'The Changing Nature and Consequences of Public Company Financial Restatements', as part of his efforts announced in May 2007 to encourage US capital markets competitiveness.
"Many respected voices at Treasury's Capital Markets Competitiveness Conference last year noted the drastic increase in financial restatements over the last decade. It is important to take a hard look at the facts behind this rise," Paulson explained, going on to add that:
"The information in this study should complement the work underway at the Securities and Exchange Commission and the Financial Accounting Standards Board to improve financial reporting for investors."
The study, conducted by University of Kansas Professor Susan Scholz, provides one of the most in-depth looks at the soaring number of financial restatements in the years before and after the Sarbanes-Oxley Act.
According to the report, financial restatements grew nearly eighteen-fold in this time, from 90 in 1997 to 1,577 in 2006, with acceleration in restatement activity occurring in 2001 before the implementation of the Sarbanes-Oxley Act.
However, restatements associated with fraud and revenue declined after 2001. Fraud was a factor in 29% of all 1997 restatements, but only 2% of 2006 restatements.
The proportion of revenue-related restatements also decreased from 41% in 1997 to 11% in 2006.
Market reactions to the restatements dampened over the decade study period, while the number of restatements grew. Market reaction to financial restatements tended to be more negative when the restatement involved fraud or revenue errors.
Additionally, the study noted that restating companies were typically unprofitable even before the restatement. In the year prior to announcing a restatement, more than half of restating companies reported a net loss.
The Treasury did not ask the study's author to develop policy recommendations. The study is intended to inform federal regulators and advisory committees, such as the SEC's Advisory Committee, on improvements to financial reporting.
The goal was to take a clear look at figures often used when discussing US companies' competitiveness and investor confidence in financial reporting.
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