Restatements from public companies have been on a general downward trend since the turn of the century, but a massive spike in 2021 led to slight elevations in 2022.
This is according to a recent report from Audit Analytics about restatements and their associated metrics from 2003 to 2022. Data shows that the total number of financial restatements peaked in 2006, then fell dramatically every year until 2009. It then stayed more or less stable until 2014, and then once again started dropping, a little bit at a time, every subsequent year until 2021, at which point there was a massive spike that hadn’t been seen since those 2006 highs.
In 2006 there were about 1,700 restatements. In 2021, there were about 1,500. In contrast, in 2019 and 2020 there were fewer than 500.
The Audit Analytics report attributes this spike to the boom in special purpose acquisition companies, or SPACs, taking place that year. It noted that, in April 2021, the Security and Exchange Commission’s acting director of the Corporate Finance division, John Coates, and its acting chief accountant, Paul Munter, issued a joint statement urging companies with warrants issued by SPACs to reconsider the accounting treatment of them. This was because warrants that are generally not indexed to a company’s own stock or that include a tender offer provision should be recorded as a liability on a quarterly basis through the income statement.
While most SPACs recorded warrants as equity at historical cost, the SEC asked companies to consider whether the shares were indexed or whether the shares included a tender offer provision. On Sept. 14, 2021, the offices of the Division of Corporation Finance and acting Chief Accountant concluded consultations with certain issuers in which they objected to the classification of redeemable shares of common stock as permanent equity. This resulted in a second wave of SPAC restatements as the vast majority had redemption features that were out of control of the issuer and, thus, temporary equity.
“The restatement spike in 2021 can be mainly attributed to the SPAC boom,” said the report. “Not only did SPACs significantly add to the overall population of SEC registrants, but a large majority also had to file restatements twice in 2021 as a result of warrant and redeemable stock issues.”
The following year saw a much lower number of restatements, which decreased by 69% from 1,467 to 454 in 2022. That year the number was a little higher than 2020 and a little lower than 2019.
The data shows a similar spike in reissuance statements since 2005, when such things needed to be disclosed. Since then there has been a steady downward trend until 2021, at which point it increases to levels not seen since 2006, followed by a dramatic crash the next year. However high its fall was, though, it was lower only in relation to the previous year; with the exception of that year, 2022 saw reissuance statements at roughly where they were in 2014. In contrast, revision statements, which had been on a downward trend since that year, were lower than they had been since 2005 following the 2021 spike.
In terms of the 2003-2022 time period, the most common reasons for restatement were: debt/equity (27% of total restatements), revenue recognition (13%), expenses (12%), cash flow (12%) and liabilities (11%).
Within 2022, debt/equity remained the top issue (22% of restatements), followed by revenue recognition (12%), liabilities (11%), expenses (9%) and deferred stock or executive compensation (9%).
Last year, finance industry entities were most likely to cite debt/equity or cash flow as the reason for their restatement; manufacturing industry entities were most likely to cite acquisitions or consolidation; and service-based companies were most likely to cite taxes or compensation.
The report drew on the Ideagen Audit Analytics Financial Restatements database, which includes data from more than 21,000 financial restatements filings disclosed by over 11,000 SEC public registrants since Jan. 1, 2001.
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