SOX and Restatements

We've already noted that while securities fraud suits had a bit of an uptick in 2007, they were still the second lowest number of filings (with 2006 the lowest) since 1996.  Similarly, Section 404(b) imposed on auditors an obligation to attest to management's assessment of internal controls.  Not surprisingly, with accountants looking over management's shoulder, the number of restatements sky-rocketed.  Over time, however, as adequate controls descended, one would expect the number of restatements to decline.  In 2006, they fell for large companies but increased for smaller ones (the companies that were given a delay on the implementation of Section 404(b).

Now the numbers are in for 2007.  Glass Lewis reports that the number of restatements fell to 1172, down from 1346 in 2006.  Audit Analytics found an even greater decline, with the number in 2007 falling to 1237, down from 1801 in 2006.  In other words, SOX is working.  With a recession looming and subprime problems growing, shareholders will at least not have to worry in general that there will be other, unexpected problems that arise from sloppy accounting and weak internal controls.