CAQ: Number of Financial Report Restatements by Listed Companies Falls 53% in a Decade, with Higher Error Rates Among Small Companies
A study released in June by the Center for Audit Quality (CAQ) shows that from 2013 to 2022, the total number of financial report restatements by listed companies fell by 53%, but the proportion of restatements among small Nasdaq companies increased significantly. Errors were mostly concentrated in accruals, reserves, and estimates, with only 3% of the 5,793 restatements over the decade involving fraud. CAQ Senior Director Vanessa Teitelbaum noted that the lasting impact of the Sarbanes-Oxley Act and the mature internal control environments of large companies are the main reasons for the decline in restatements, while the control environments of small companies remain immature.
Key Findings
- Data from the Center for Audit Quality (CAQ) shows that financial statement restatements among public companies fell 53% cumulatively between 2013 and 2022. During the same period, restatements among smaller companies listed on Nasdaq rose from 30% in 2014 to 55% in 2022.
- The CAQ noted that companies most commonly reported errors in accruals, reserves, and estimates. Of the 5,793 restatements over the decade, 3% were identified as involving fraud. The center examined errors companies reported under Item 4.02 of Form 8-K, as well as so-called "little r" restatements triggered when prior financial statements, while not material, would result in a misstatement if corrected in the current period.
- Although the impact of official regulation remains inconclusive, Vanessa Teitelbaum, senior director of professional practices at the CAQ, said in an email response: "It is reasonable to infer that a strong regulatory environment and government oversight do help maintain lower levels of restatements."
Deeper Analysis
Teitelbaum believes that, although the Sarbanes-Oxley Act has been in effect for more than two decades, it continues to guard against financial statement errors. The law requires enhanced audit committee oversight and mandates that CEOs and CFOs certify financial statements—requirements that "are now embedded in the fabric of the financial reporting process," she said. "They are critical to financial reporting quality and help reduce the incidence of restatements."
"Especially in larger companies, the control environment, including processes and controls, has matured," Teitelbaum said, noting that improvements in audit quality are also likely helping to avoid restatements.
In contrast, smaller companies remain constrained by relatively weaker internal controls. "You can see more restatements among smaller and emerging companies, likely because their control environments are not yet mature," she added.
According to the CAQ, financial institutions, banks, and insurance companies filed the most restatements over the decade. Teitelbaum explained: "Highly complex industries tend to be regulated, and stricter regulation may expose more restatement needs. Yet somewhat paradoxically, financial institutions are subject to complex and subjective accounting standards, which in themselves may also lead to more restatements."
The CAQ's findings suggest CFOs should "carefully examine expenses and related estimates," Teitelbaum advised: "CFOs of newer or smaller companies would be well advised to consider investing in long-term, sustainable infrastructure that supports high-quality financial reporting."
The study excluded 1,155 restatements stemming from an April 2021 SEC announcement regarding the proper accounting treatment of warrants issued by special purpose acquisition companies (SPACs). The CAQ said that, following the announcement by the agency's chief accountant, a large number of SPACs filed restatements citing "debt, quasi-debt, warrants, and equity (BCF) securities issues" and "debt and/or equity classification issues."