Restatements Soar Due to Sarbanes-Oxley

The WSJ reports this morning:

Restatements of financial results by public companies soared in 2005 as auditors drilled deeper into corporate accounts, in part because of a sharper focus on requirements laid out by the Sarbanes-Oxley corporate-governance act, according to research firm Glass Lewis & Co.
The silver lining: The near-doubling in the number of restatements by U.S. companies last year — 1,195, compared with 613 in 2004 — could signal that financial-reporting changes made in the wake of the Enron and WorldCom scandals are working. Although restatements — which, after all, are acknowledgments of accounting errors — signal that management and auditors have missed problems and can lead to short-term swings in a company’s share price, they also give investors a truer picture of a company’s finances.
“Over time, as companies continue to improve their internal controls, we expect the number of restatements eventually will decline, perhaps as soon as 2006,” San Francisco-based Glass Lewis said in a report to its clients, who include money managers and other large investors.

Of course, the number of restatements could also decline if more companies decide it’s not worth the trouble of going public.
Some folks love Sarbanes-Oxley. For one thing, it’s driving the boom in private-equity. It also might as well be called the Accountant Full Employment Act of 2002. Here’s the chart of Resources Connection (RECN), an accounting staffer, since the day Bush signed Sar-Box.

Posted by Eddy Elfenbein on March 3rd, 2006 at 7:33 am

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