In an effort to encourage U.S. capital markets competitiveness, Treasury Secretary Henry Paulson commissioned a study that has found fraud-related financial restatements which soared to a record high in 2001 are down significantly in more recent years.
“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,” said Paulson in a statement.
The study, conducted by University of Kansas Professor Susan Scholz, looked at the number of financial restatements in the years before and after the Sarbanes-Oxley Act.
Financial restatements grew nearly eighteen-fold: from 90 in 1997 to 1,577 in 2006. Most of that restatement activity occurred in 2001 before the implementation of SOX.
Restatements associated with fraud and revenue, however, declined after 2001. Fraud was a factor in 29 percent of all 1997 restatements, but only 2 percent of 2006 restatements.
The proportion of revenue-related restatements also decreased from 41 percent in 1997 to 11 percent in 2006.
Not surprisingly, 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 are typically unprofitable even before the restatement. In the year prior to announcing a restatement, more than half of restating companies reported a net loss.
No policy recommendations were sought from the study’s author but the Treasury stipulated the findings would inform federal regulators and advisory committees, such as the Securities and Exchange Commission’s Advisory Committee on Improvements to Financial Reporting.