Based on an analysis of 5,793 restatement events, a steady decline in the total number of restatements is observed until the final year of the sample period. Additionally, the relative percentage of 4.02 restatements declined from 28% to 18% over the first seven years of the sample period after which the trend reverses and climbs to 38% in 2022.
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Financial Restatement Trends in the United States: 2013 – 2022
The Center for Audit Quality (CAQ) has conducted an analysis of restatements announced over the decade (2013 – 2022). Restatement activity is commonly referenced as a measure of financial reporting quality; therefore, a periodic review of associated trends may be of interest to investors and other users of financial statements. Additionally, given changes in both the regulatory and economic environments, an analysis of restatement trends may provide some insight into how the financial reporting ecosystem is managing factors that can affect the risk of material misstatement.
A note on “Big R” versus “little r” restatements
“Big R” restatements are attributable to errors determined to be material to previously issued financial statements such that the statements are deemed unreliable (referred to in this report as 4.02 restatements). Conversely, “little r” restatements are attributable to errors determined to be immaterial to previously issued financial statements but would result in a material misstatement if corrected in the current period.
The key findings of the report provide descriptive evidence in response to several questions, including:
Inappropriate accounting for accruals, reserves, and estimates is cited most frequently in restatement announcements, i.e., 30% of restatements overall. The misapplication of accounting standards for financing activities, e.g., issues with the measurement of debt, quasi-debt, equity securities, and derivatives, makes up the second most common category at 20% of overall restatements.
Fraud, as defined for the purposes of this study, is implicated in 3% of the total population of restatements. For the subset of 4.02 restatements, the percentage of fraud-related restatements increases to 7%.
The top three industries contributing most to the population of restatements are: 1) Financial, Banks & Insurance, 2) Healthcare & Pharmaceuticals, and 3) Computer & Software. The Healthcare and Pharmaceuticals industry exhibits a consistently upward trend, increasing from 11% in 2013 and 2014 to a peak of 20% in 2021. When compared to the previous decade studied in Scholz (2014), Healthcare rose from sixth place to second place in the ranking of industries based on their contribution to restatement announcements.
Restatement companies are smaller, in terms of average assets, in eight of the 10 years under study. Specifically, when compared to the population of companies covered by S&P Global’s Compustat database with reported total assets of $18 billion overall, restatement companies’ average assets are $13 billion. The subset of companies announcing 4.02 restatements are even smaller, reporting average total assets of $2.3 billion overall.
Companies that have announced a restatement over the sample period are more likely to have issues with internal control over financial reporting. However, material weakness disclosures via management’s assessment of ICFR are not predictive of restatements.
Based on the subset of restatements announced over the four years CAM reporting has been in effect (2019 to 2022), critical audit matters do not contribute to the public’s understanding of restatement risk.
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