A return to review of restatements.

• Author: Orenstein, Edith
• Position: Washington insights

Over the past several months there has been accelerated action relating to a topic covered in this column last August, "Do Restatements Mean Sarbanes-Oxley is Working?" Since then, several federal advisory committees have been formed and rule-making initiatives are taking place on the subject of restatements and materiality.

In May, U.S. Treasury Secretary Henry Paulson announced that among the first steps in his capital markets action plan, Treasury will conduct its own study of restatements. This study will take place concurrently with the other steps in the plan, including formation of an advisory committee on the sustainability of the audit profession, Treasury's Advisory Committee on the Accounting Profession (ACAP). The committee, chaired by former U.S. Securities and Exchange Commission (SEC) Chairman Arthur Levitt Jr. and former SEC Chief Accountant Donald Nicolaisen, is to begin meeting this fall.

Treasury's restatements study has already begun and appears to be on a fast track. "Restatements have soared during the past decade from 116 in 1997 to 1,876 in 2006," Paulson noted when this initiative was first announced, triggering concerns about what impact this might have on the capital markets. Kristen E. Jaconi, senior policy advisor to Undersecretary for Domestic Finance Robert K. Steel, said that results of the study should be made public by next year's first quarter.

A separate but related initiative endorsed by Paulson is the new SEC Advisory Committee on Improvements to Financial Reporting, abbreviated as CIFR (pronounced "cipher"). Committee Chair Robert Pozen said at the committee's inaugural meeting in August that it will try to "de-cipher" issues that have needlessly added to the complexity of financial reporting. (FEI members named to CIFR are listed in this issue's Financial Reporting column.)

Restatements came up frequently during the discussion at CIFR's August meeting, as a possible indicator of a complexity overload in financial reporting. SEC Chief Accountant Conrad Hewitt noted then that studies show almost 10 percent of U.S. public companies restated their financial statements in 2006. He called number "alarmingly high," adding that it "has the potential to obscure companies with serious underlying problems, versus unintended misapplications of nuanced literature."

Pozen added, "From the preparers' and auditors' point of view, people who put together financial statements .... [are] trying very hard to get it...