Restatement of Financial Statements

Errors that trigger a restatement include misapplied accounting rules, wrong cut-off, formula mistakes and deliberate manipulation. A correction of an error differs from a change in estimate, which applies from now on, and from a change in policy, which is applied across comparatives. Where an error is material to earlier periods, management revises the numbers, discloses the amounts affected, and in many regimes the company must tell investors immediately that earlier reports can no longer be relied on. In the United States, a full reissue is informally called a “Big R” restatement, while a correction made quietly within comparative figures is a “little r”. Consequences can be heavy: a falling share price, an audit committee investigation, regulator action, lawsuits, breached loan covenants, and recovery of executive bonuses under clawback policies. Restatements often reveal a material weakness in controls. Investors tend to treat the announcement as a signal to doubt other figures from the same management.

A wholesale distributor discovers that returns of goods were not deducted from sales for the past two years, overstating revenue by 4%. The audit committee commissions a review, the board announces that earlier statements should not be relied on, and corrected accounts are published with a note explaining the effect. The share price drops, the CFO leaves, and the company reports a material weakness over revenue controls.