Fewer financial restatements signal rising data quality
The Center for Audit Quality (CAQ) recently unveiled a promising trend in financial reporting: the number of financial restatements filed with the SEC has decreased by more than 50% over the last decade. The comprehensive study, covering 2013 to 2022, highlights a significant improvement in financial reporting quality.
According to the CAQ’s analysis, financial restatements dropped from 858 in 2013 to just 402 in 2022. These restatements, which correct errors in public company financial statements, have been steadily declining for 16 years. This period saw the most notable decline in “Big R” restatements, which are due to material errors that render previous financial statements unreliable.
Historically, restatements surged following the introduction of the Sarbanes-Oxley Act in 2002, peaking at nearly 1,800 in 2006. Common issues leading to restatements include inappropriate accounting for accruals, reserves, and estimates, which accounted for 30% of cases, and misapplication of standards for financing activities, at 20%. Notably, fraud was cited in only 3% of restatements.
The reduction in restatements is a testament to improved internal controls over financial reporting (ICFR). However, the CAQ study found that ICFR reports typically flagged issues after restatements were announced, indicating they are not predictive. Despite this, the overall trend reflects a positive shift towards greater transparency and accuracy in financial reporting. This decline in restatements is a welcome indicator of enhanced data quality and regulatory effectiveness. Of course, assurance over US SEC Inline XBRL filings would be a welcome enhancement to the data relied on by more and more users.
For more detailed insights, you can read the full CAQ report here.
