RESTATING YOUR CASE
Restatements as a fact of life.
By Kate O ’Sullivan

Restatements have become a fact of life for many finance departments, with one out of every 10 U.S. public companies restating their financials in 2006. They’ve become so widespread, in fact, that some of the stigma may be fading, according to a recent study by the Public Company Accounting Oversight Board. Two PCAOB economists found that negative investor reaction in the two days following a restatement has been reduced by 71 percent in the post-Sarbanes-Oxley era compared with pre-2002 reaction (as measured by declines in share price).

Companies also seem to be getting better at the restatement process. A new report by Huron Consulting Group found that nearly 80 percent of companies publishing restated financials do so within four months of citing a material weakness on Form 8-K. Many of these companies are likely starting to prepare for a possible restatement while simultaneously investigating the issue in question, which can make for a speedier filing.

But for the remaining 20 percent, the process can take much longer, with 2 percent spending 8 to 12 months and 1 percent devoting more than a year to a restatement. Firms with more complex accounting problems to untangle took far longer than their peers to restate: companies with over four accounting issues to address took twice as long as those with fewer.

To make a restatement project go smoothly, up-front planning is critical, says Joseph Floyd, leader of the financial consulting practice at Huron. “Companies should stop and call a timeout to make sure they’re planning the process right,” he says. Bob Blakely, the executive vice president and former finance chief at Fannie Mae who was brought in to the mortgage company to help manage a massive restatement project starting in 2006, says CFOs should take tremendous care with such early-stage planning. “Once you understand the magnitude of the restatement activities, you have to lay out your plans in great and granular detail,” he says. Assigning individuals discrete tasks with deadlines helps move the process along and creates a sense of accountability.

Blakely also says encouraging staffers to speak up about problems, regardless of when they are uncovered, is critical. “Everyone needs to understand that the messengers will not get shot.”