Restatements have become an increasingly common fact of life for finance departments, with 1 out of every 10 U.S. public companies restating their financials in 2006. They've become so widespread, in fact, that some of the stigma may be fading, according to a recent study by the Public Company Accounting Oversight Board. Two PCAOB economists found that negative investor reaction in the two days following a restatement has been reduced by 71 percent in the post-Sarbanes-Oxley era compared with pre-2002 reaction (as measured by declines in share price).
Companies also seem to be getting better at managing the restatement process, if their relatively quick filing times are any indicator. A new report by Huron Consulting Group found that nearly 80 percent of companies publishing restated financials do so within four months of citing a material weakness in a Form 8-K. "We were surprised to find so many registrants able to file so quickly after they filed their 8-Ks," says Jeffrey Szafran, managing director at Huron. Many of these companies are likely starting to prepare for a possible restatement while simultaneously investigating the issue in question, which can make for a speedier filing.
But for the remaining 20 percent, the process can take much longer, with 2 percent spending 8 to 12 months and 1 percent devoting more than a year to a restatement. Firms with more-complex accounting problems to untangle took far longer than their peers to restate: companies with five or more accounting issues to address took twice as long as those with four or fewer issues.
To make a restatement project go smoothly, up-front planning is critical, says Joseph Floyd, leader of the financial consulting practice at Huron. "Companies should stop and call a time-out to make sure they're planning the process right," he says. "We saw a lot of people who just went off to the races, and they hit a lot of speed bumps because they didn't fully evaluate what they were trying to do."
Bob Blakely, the executive vice president and former finance chief at Fannie Mae who was brought in to the mortgage company to help manage a massive restatement project starting in 2006, says CFOs should take tremendous care with such early-stage planning. "Once you understand the magnitude of the restatement activities, you have to lay out your plans in great and granular detail," he says. Assigning individuals discrete tasks with deadlines helps move the process along and creates a sense of accountability.
About 19 percent of the time, Huron found that companies turned up additional accounting problems while preparing for a restatement, which clearly delayed the process. Blakely says encouraging staffers to speak up about problems, regardless of when they are uncovered, is critical. "Everyone needs to understand that the messengers will not get shot," he says. "The whole objective is to identify issues so they can be solved quickly, even if they represent setbacks. It's just not a linear process."
Tips for Managing the Restatement Process
- Devise a plan rather than plunge in
- Designate a project manager
- Lock down the list of issues
- Consider teams and leaders for common issues
- Identify the starting point
- Use technology
- Prepare a timeline with milestones and regularly scheduled updates
- Establish a troubleshooting process
- Establish communication protocols with key constituents (such as directors and auditors)
- Assess resource needs
- Keep documentation and files intact
- Be prepared to pay retention bonuses
- Don't wait to draft financial statements
Source: Huron Consulting Group