A Closer Look at Financial Statement Restatements
Analyzing the Reasons Behind the Trend

By Lynn E. Turner and Thomas R. Weirich

Just when the number of erroneous financial reports by publicly traded companies seemed to have peaked, they continue to climb. This article presents results of financial statement restatements during 2005 and the first nine months of 2006. The authors analyzed the reasons behind restatements and broke them down by auditor. They found that lease-accounting errors were responsible for a large number of restatement and suspect that hedge-accounting restatements may be a concern in the coming quarters. The authors also noted a recent surge in “stealth” restatements—restatements filed with an amended filing, 8-K, or other public announcements. In analyzing restatement rates by auditor, the authors caution that, although a high restatement rate may reflect low-quality audits, it might also be interpreted as a willingness to require corrections. Finally, the study found that smaller companies were nearly twice as likely to restate as larger companies.