09 April 2008

Treasury competitiveness study on changing nature and consequences of financial restatements

Secretary Paulson announced the completion of a study, part of his effort to encourage U.S. capital markets competitiveness. "The information in this study should complement the work underway at the SEC and the FASB to improve financial reporting for investors”, Paulson said.

The study provides an in-depth looks at the soaring number of financial re-statements in the years before and after the Sarbanes-Oxley Act. Financial re-statements grew nearly eighteen-fold in this time, from 90 in 1997 to 1,577 in 2006 with acceleration in re-statement activity occurring in 2001 before the implementation of the Sarbanes-Oxley Act.

However, re-statements associated with fraud and revenue declined after 2001. Fraud was a factor in 29 percent of all 1997 re-statements, but only 2 percent of 2006 re-statements. The proportion of revenue-related re-statements also decreased from 41percent in 1997 to 11 percent in 2006.

Market reactions to the re-statements dampened over the decade study period, while the number of re-statements grew. Market reaction to financial re-statements tended to be more negative when the re-statement involved fraud or revenue errors.

Additionally, the study noted that re-stating companies are typically unprofitable even before the re-statement. In the year prior to announcing a re-statement, more than half of re-stating companies reported a net loss.

Press release

Study

© Graham Bishop