Financial Restatements: An Analysis Pre-and–Post Sarbanes-Oxley (2000–2009)

The ultimate objective of financial reporting is to provide transparent financial statements and disclosures that meet the informational needs of investors and other users of financial statements. One of the primary goals of the Sarbanes-Oxley Act (USHR 2002) is to provide more reliable financial reporting, thereby restoring public confidence in the U.S. markets. But what do restatements say about financial statements filed by public registrants and audit reports issued by their external auditors? Restatements provide prima facie evidence of inaccurate and/or incomplete financial reporting and audit failures. This paper contributes to the existing restatements literature. Using data collected from Audit Analytics™, restatements are analyzed over a ten-year period (2000-2009) based on market capitalization, audit firms, and accounting and reporting issues. To provide a broader context, restatements are juxtaposed against total audit opinions issued during the period under review. The results show that after six years on the rise (2001-2006), the number of financial restatements filed in 2009 fell for the third consecutive year (2007-2009). However, the analysis also unearths some important issues that bear concern. For example, local and regional firms are associated with 58.1 percent of all restatements filed by non-accelerated registrants during the ten-year period. These firms are associated with over half of all non-accelerated restatements filed during five of the ten years (2005-2009). Local and regional firms are associated with a disproportionate percentage of restatements filed by accelerated registrants when compared to total audit opinions issued by these firms. These firms have significantly higher ratios of total restatements to total audit opinions than Big-4 firms or national firms. The number of annual audit opinions issued by Big-4 firms to non-accelerated registrants has declined each year during the ten-year period. The lion's share of these non-accelerated audits have been assumed by local and regional firms. These data support the assertion that non Big-4 firms have absorbed relatively small, marginal audit clients shed by Big-4 firms (Rama and Read 2006), and thus, a new wave of restatements may be on the horizon.