Achieving financial reporting excellence and transparency can no longer be a goal; successful companies consider it a requirement, as company and executive reputations hinge more than ever before on the transparency and reliability of financial reporting.
“Financial restatements … not only shake investor confidence but also cost investors billions of dollars in stock value as companies’ market prices plummet after the restatements.”
–The U.S. General Accounting Office
The Sarbanes-Oxley Act has driven companies to a disciplined approach toward reliable financial reporting. Seamless accounting and transaction processing procedures have been put in place to record and capture information in financial records accurately. However, many companies continue to face challenges from inadequate procedures and lack of sufficient oversight and monitoring in their reporting of financial results.
The result is improperly supported, unsubstantiated or reconciled accounts, or lack of resolution and/or adjustments to reconciled items – any of which can impair reporting and threaten enterprise value.
The Audit Analytics Financial Restatement Report for 2008 covers eight years of financial restatements and examines 9,000 restatement filings disclosed by public registrants since January 1, 2001. One noteworthy surprise was that for the first time ever, more than 50 percent of all restatements filed were “stealth restatements,” which are defined as a restatement contained in a periodic report without a prior disclosure in Item 4.02 (a “do not rely on prior reporting” notice) of an 8-K filing.
Challenges and Opportunities
Risks arise from changing accounting standards, complex nonrecurring business transactions, changes in financial reporting systems and employee turnover. Such risks challenge the ability to maintain reporting excellence. Companies worldwide are working to formalize and document financial reporting process procedures and controls. However:
- Restatements continue to occur at a regular pace.
- Risks or “soft spots” in an organization’s application of accounting principles are often not understood by senior management.
- Reporting standards are beginning to evolve more rapidly than ever before.
- Sign-off by the external auditor on an application of accounting principles does not guarantee that the accounting and reporting is defensible.
Corporate leaders today seek trusted relationships to obtain objective, uncompromising advice regarding financial reporting risks. Reliable research can help companies monitor changing regulations and enhance ongoing reporting practices. Appropriate external auditor collaboration can assist in identifying risks and managing reporting projects, while preserving the independent audit relationship.
Our Point of View
Concerns such as the financial close process, challenges faced during periodic reconciliation of accounts and the sanctity of segregation of duties are inherent in any business. Management can often identify opportunities for improvement and avoid restatements by better comprehending and managing such risks. A deep-rooted understanding of underlying business processes can help mitigate impact on financials resulting from control deficiencies. Companies should aim at putting into place a self-sustaining control mechanism for their business and financial reporting processes, thereby ensuring continuous improvement and an environment of proactive and prospective risk management.
How We Help Companies Succeed
Our Financial Restatement & Account Reconciliation Services have helped companies around the world navigate their way through complex account reconciliations and/or financial restatements while driving them toward improved reliability, accuracy and transparency in their financial reporting.
Services under this portfolio include:
- Financial Reporting Risk Profile Assessment: Help companies in understanding risks arising from the historical application of generally accepted accounting principles (GAAP), preparedness for new or impending accounting standards, and the sensitivity of financial estimates to changes in operations and management decisions.
- Reconciliation Solutions: Assist with reconstructing account balances, identifying root cause factors and quantifying the impact for each fiscal year.
- Financial Reporting Research: Support in monitoring changes to technical standards and assessing the specific impact of research, as well as assisting in the implementation and documentation of technical standards.
- Business Transactions: Help navigate project and reporting risks arising from complex or unique business transactions, including:
- Business combinations/consolidations
- Financial statement restatements
- Business restructurings and/or refinancing
- Related-party transactions
Moreover, our proactive approach focuses on setting a course with you to stabilize and improve processes in alignment with business objectives.
- Improved governance and risk mitigation: After addressing their $50 million intercompany out-of-balance situation, we helped an $18 billion consumer products company set a foundation of consistent reconciliation while compressing timelines.
- Improved compliance: When managing a restatement for a $350 million extractive industries company, we worked closely with the SEC and client auditors to manage the restatement and ensure quality in calculations, work papers and drafts.
- “Who, when, why and how”: After a restatement of financial statements as a result of differences of $150 million in book and perpetual inventory, a financial investigation with outside counsel to determine causes for this error was performed. In three months, necessary historical financial restatements for the previous five years (2002 through 2006) were quantified and significant causes of the accounting variances identified.