Spotting a big, juicy financial restatement in the headlines has become a rare occurrence. But when it does happen, it can take over the airwaves quickly.
That was the fate of Bank of America when it announced it had found a mistake in the method it used to value securities the bank had absorbed when it acquired Merrill Lynch in 2009. While the scope of the error was limited -- representing 1 percent of earnings per share and affecting regulatory capital rather than the income statement -- the fallout was dramatic.
The bank will need to refile its “stress test” numbers to the Federal Reserve and BOA suspended plans to return capital to shareholders in the form of dividends and buybacks while it crunches the numbers again.
Restatements that result from errors made while interpreting complex or evolving regulations are becoming more common, and filers need to act rapidly when they do discover a mistake, says Randy Elder, professor of accounting with the Whitman School of Management at Syracuse University.
“If it meets the level of a significant deficiency they need to come out and say they are working rapidly to put controls in place so it does not happen again,” Elder says. “I think this speaks to the complexities of measuring regulatory capital and the complexities of modern accounting. It’s fairly easy to be critical of the regulators, but I think it's also discouraging that these types of mistakes go on for several years.”
While financial restatements are becoming less common, they are increasingly being spurred on by regulatory changes rather than fraud, says Donald Whalen, general counsel and director of research at Audit Analytics. In 2013 the top “issues” that caused the most restatements were debt valuations, cash flow classification errors and revenue recognition “issues,” according to Audit Analytics' soon-to-be-released 13-year comparison of financial restatements.
There has been a steady decline from 2005 to 2009 in financial restatements requiring an 8K disclosure and then a leveling off, Whalen says.
“I think that, in many ways, Sarbanes Oxley did do what they actually wanted it to do, and that financial restatements are not as bad because they are caught more quickly and before it gets out of hand,” he adds.
“Everybody is rolling up their sleeves, focusing on the internal controls and the financial reporting and trying to get to the point where what they to claim on the statement is accurate.”