Quick quiz: What’s the cause of most of the current wave of corporate financial restatements?
The answer from a casual observer is most likely to be stock-option backdating. Or you might think trouble with derivatives accounting might be the source of most of the trouble. Then again, the old standby of revenue recognition could be the impetus.
If you gave those answers, you’d be wrong on all three counts — provided the quizmaster was Scott Taub, deputy chief accountant of the Securities and Exchange Commission. Taub, who has been researching the causes of restatements in 2005 and 2006, lays the abundance of problems squarely at the door of simple human bungling.
Speaking at a session of the recent Financial Executives International conference on current financial-reporting issues, Taub said that 55 percent to 60 percent of the errors triggering recent misstatements were “simple misapplications of [generally accepted accounting principles] or books and records problems.”
Overall, those restatements are piling up: in 2005 the number of companies filing restatements surged over previous years to 1,195, and this year’s tally looks to beat that number, according to Glass, Lewis & Co., a corporate-governance research firm. As of the end of September, 1,070 firms issued restatements this year, and Glass, Lewis predicted that 2006 will end with a total of 1,300 restatements.
What’s more, considering that most of the restatements are triggered by honest errors rather than more heinous doings, finance departments might be making it worse for themselves by keeping investors in the dark about the effectiveness of their companies’ internal controls. “In 50 percent of the restatements, there was no information about how the company found the errors,” Taub said of his findings. When they restate, companies would do well to disclose how they found the triggering errors, he added.
Taub also pondered the motives driving executives to backdate. “Backdating is lying and lying is bad,” he said. “I can’t figure out how those involved convinced themselves that it was OK.”
The SEC official drew laughter from the audience when he cited the gang-that-couldn’t-shoot-straight incompetence that sometimes follows hard upon option-date finagling. “Some companies are not sure when they actually issued the options after they backdated,” he said.