More on Restatements and the Benefits of SOX Section 404

The number of restatements set out earlier this week show an inexorable climb, no doubt in part because of the requirements of Section 404 of SOX. Perhaps the most intriguing thing about the trend is the shift in the nature of the companies undertaking the restatements.

Larger companies have been subject to the requirements of Section 404 for some time now.  As one might expect, they ought to be getting their financial house in order, with the number of restatements at least hitting a plateau. In fact, they are falling. A comparison of the first 9 months of 2005 and 2006, according to Glass Lewis, shows a decline of 25% in companies with a market capitalization of greater than $750 million and a 13% decline in companies with a market capitalization between $75 million and $750 million. (This data has been confirmed by email correspondence with Glass Lewis).  So where is the growth? Restatements by microcap companies were up 45%, explaining the overall increase for the period.