News Scan

Restatements Rocket

The number of companies that issued corrections to their financial reports hit a new high last year, according to a study by research and proxy advisory firm Glass, Lewis & Co. A total of 1,195 U.S. public companies -- or about 8.5 percent -- filed restatements in 2005, nearly dou-ble the previous year's total of 613. In many cases, the corrections were the result of management's failure to apply basic accounting rules. For example, Solectron Corp., Baxter International Inc. and Sirva Inc. restated because they had failed to perform basic reconciliation of their accounts, according to Glass Lewis.

The top driver of restatements was expense recognition, which soared 165 percent from 2004 and accounted for 25 percent of all reported errors. More than half of the errors in this category stemmed from improper lease accounting practices. Hundreds of organizations simply hadn't been following GAAP, the report notes.

"Lease accounting restatements caught the financial reporting world by surprise," comments Jeffrey Szafran, managing director with Chicago-based Huron Consulting Group. "Most companies had a good-faith belief that they were getting their financial reporting right but found out that they were not when it came to lease accounting. This created a ripple effect through the financial report world. The good news is that this was likely a one-time event."

The number of companies that filed restatements due to errors in hedge accounting also rose sharply, from 25 in 2004 to 57 last year. Among them were General Electric Co. and insurance giant American International Group Inc.

The share-price volatility that generally follows a restatement can be severe. For example, in the three months after its first restatement in 2005, AIG saw a market capitalization decline of $54.8 billion as measured from its high in the three months before the restatement, according to the report.