Executive Summary
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Financial restatements are serious corporate reporting failures that have the potential to undermine stakeholder confidence and decisions.
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The quality of corporate governance, risk management, and compliance systems is critical in controlling financial restatement risk within organizations.
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The number of financial restatements increased consistently after the Sarbanes–Oxley Act until 2007, when the number and magnitude of restatements started to decrease.
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The research literature in accounting and finance provides useful evidence about the leading causes of financial restatements, including accounting complexity, transaction complexity, human error, and fraud.
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The effects of restatements are widespread and contingent on the cause of the restatement. Possible restatement effects include negative market reactions, reduced credit access, and turnover within management and the board of directors.
Introduction
Both the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) in the United States highlight the importance of “reliability” as a primary qualitative characteristic necessary to make accounting information useful to users making economic judgments and decisions. Reliability in this context refers to a quality of financial reporting that makes it a verifiable, faithful representation of transactions and events that have occurred within an organization.1
Financial restatements represent reporting failures where companies admit that previous financial representations are not reliable. Such reporting failures have various potential causes and effects that can undermine company health and raise questions about the expertise and integrity of individuals that affect reporting, operations, and compliance. In the post-Sarbanes–Oxley era, financial report users (for example, investors, creditors, analysts) have seen an explosion in the number of restatements, giving rise to questions about why so many companies find it difficult to produce accurate information.
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