Restatements Restatements Restatements

Lets do some follow up on the benefits of SOX. The most criticized provision has to be Section 404, which requires management to assess the “effectiveness of the internal control structure and procedures of the issuer for financial reporting” and for the outside auditors to “attest” to this assessment. This provision (coupled with those making accounting firms more independent and increasing the authority/independence of the board of directors) ought to help make financial statements more accurate. One way to assess this is to examine the number of restatements since the adoption of SOX.

They are way up. Data from Glass Lewis shows the following:

1997: 116

1998: 158

1999: 216

2000: 233

2001: 270

2002: 330

2003: 513

2004: 627

2005: 1,250

As Al Lewis, a columnist at the Denver Post, has written, that means that 21.5% of all public companies have restated over the last four years.  In fairness, data from before 2003 was put together using a different methodology by organizations other than Glass Lewis and may understate the count somewhat. 

And these restatements are not without cost. The GAO indicated in a study of post-SOX restatements that ended in September 2005 that the market price of the companies fell $63 billion (adjusted for market movements) around the time of the announcement. GAO Report 6-679 (2006).  Theracetothebottom.org is confident that from now on, those contending that the costs of SOX outweigh the benefits will be sure to add in these amounts to the benefit column (with the amount adjusted upward to reflect the restatements since Sept. 2005).