Introduction
The term Restatement is referred to the restating of the financial reports or certain transactions that were originally stated in a wrong manner or wrongfully. Restatement is actually a corrective measure taken by the management either on the indication of the auditors or regulatory bodies to modify their financial statements and reports, so that it can give a true and fair view of the company’s affairs. In the recent few years the number of accounting restatement filings in the United States has been dramatically increased, i.e. 475 restatements filed in 2003 to 1,538 restatements filed in 2006. It has made aquestion mark over the responsibility and compatibility of the management regarding the preparation of the financial statements and in complying with their reporting requirements. Most of the analysts have worked upon finding the reasons behind the need for restatement of the financial reports and found that there are a number of reasons, including Proliferation of accounting rules and implementation guidance, accounting complexity, application of the Sarbanes-Oxley Act of 2002 (SOX) section 404 requirements, earnings management, second-guessing of management judgment and transaction complexity. This means that a restatement may occur due to any of the above stated reasons but this does not provide a deep insight about the concept of the restatement and the underlying causes behind its occurrence. Research shows that a false statement may occur either intentionally or unintentionally, because a person may do a wrong thing either to deceive other and get some unusual benefit or he does it due to lack of knowledge or misunderstandings. After conducting an analysis of a number of disclosures surrounding restatement that have been filed between 2003 and 2006, it has been evaluated that there are four major causes behind each restatement: intentional manipulation, internal company error, some characteristics of the accounting standards and the transaction complexity. Restatement usually has a certain affect over the income statement of a company, which may be positive or negative, i.e. the increase in net income due to the impact of the restatement is termed as positive and the decrease in the net income is termed as negative impact of the restatement.
Data evaluation and the causes of restatement
After critically evaluating the data set of Glass Lewis & Co. that includes about 4,070 restatement filings of the United States, we came to know that each restatement has their own independent cause and impact over the decision making power of the investors or the reader of the financial statements. A number of analysts have worked upon the evaluation of the data and discussed each restatement separately by identifying the differences between them to classify them accurately. After making individual classification they have reconciled each of the restatement to arrive at the final classification. From the analysis it has been evaluated that about 70% of the restatement occurs due to a single underlying cause and if a restatement has more than one cause, it should be classified on the basis of the most primary cause. After classifying the restatements according to their respective causes, we got the following four categories.
Internal Error: - An internal company error is termed as an unintentional restatement that is caused due to the weak internal controls of the organization. It may occurs due to the lack of knowledge of the individuals recording the transaction or unintentionally skipped by them while sorting out the list of transactions. Such types of errors are more likely to be reported in the inventory, misclassification, contingency and provisions, tax issues, expenses. The internal error restatements are more likely to have no effect over the income statement of a company or less likely to have a negative impact because as this type of restatement is occurred due to an unintentional act and therefore, the person responsible for such restatement don’t have any sort of benefit associated with it. The internal error usually leads to such restatements those are made by the management itself after reviewing the financial statements or on the direction of the auditor. Such misstatements don’t affect the credibility of the company and nor it hurts its corporate social responsibility. However, these misstatements are usually resulted in a material income affect because such restatements are resulted due to the act of negligence or lack of knowledge of the accounting personnel. These misstatements can also be caused by the misapplication of the accounting principles or some time companies are trying to explore or use such accounting approaches that can present their income statements and financial position strong in front of the general public, so that they can be attracted towards the entity. Moreover, the quantity of such restatements can be reduced by integrating a single standard accounting system in the company and by educating and training the employees so that they can appropriately record all the transactions..............
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