Restatement numbers go down…and up

I recently read a report that cited the overall number of public company restatements fell from 820 in 2011 to 768 to 2012, which is down from the peak in 2007 of 1,213.  The more interesting news is that large public companies – accelerated filers under SEC parlance – saw restatements increase from 202 to 245 during the same time period and in fact it is up over 50% from the 158 restatements in 2010.  The other interesting statistic is that the severity of the restatements – based on earnings impact, time frame, etc. – decreased over the same time periods.

While overall this is good news, the question that struck me was why are the biggest companies having more difficulty getting the accounting right in the first place.  The lack of “severity” of the errors leads one to believe it isn’t fraud.  So if it isn’t fraud, what is it?  I think the statistics above indicate that we might have reached the point where accounting has become so complicated that even large companies with ample resources and dedicated staff AND their auditors, generally big 4, can’t get it right all of the time.

There has been a lot of press about the FASB and AICPA attempts to reduce the complexity of accounting for private companies.  While Billy Atkinson, Chair of the PCC, and I do not see eye to eye on some private company issues, I do agree with him when he says that the maybe the private company concerns with some of the accounting standards really are concerns about the overall complexity accounting standards for everyone including public companies.

One thing most newly issued and proposed standards have in common today is the conceptual purity of the standards.  Take the initial proposal on the leasing standard.  It was clearly a great achievement of how to account for all leases as financing transactions.  We can talk about a lot of different issues with the proposal, but how about this one.  Instead of waiting for what is likely to be more than six years from when the project started to get a theoretically perfect standard on leasing in place, we could have had a workable solution to get the leasing liability on the balance sheet proposed, exposed and issued in a year if they had been less worried about being theoretically perfect and more concerned about putting something in place that gets you 95% of what was needed and 100% of an answer that would help investors understand the liability and make better investment decisions.

And another side effect of more practicable, less pure accounting – fewer restatements.  At least that is my theory.  Unfortunately, I don’t think I will ever have a chance to prove it.

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