In November 2021, Audit Analytics published its 20 year review of restatements, showing that the number of “Big R” reissue restatements in 2020, the final year of the review, was at an all-time high. According to the report, there were “81% fewer retreatments in 2020 than the 2006 peak and 26% fewer than in 2019.” Notably, however, while in 2005 reissue restatements accounted for the majority of restatements, in 2020 reissue restatements only accounted for 24.3% of restatements; revision restatements represent 75.7% of all restatements. Yesterday at the annual meeting of the Securities Regulatory Institute at Northwestern Pritzker School of Law, Lindsay McCord, chief accountant of Corp Fin, raised a question: were companies properly “objective” when did they assess whether a restatement should be a “Big R” or a “small r” restatement?
[Below based on my notes, so standard caveats apply.]
At SRI, the accounting panel pointed out that the materiality test provided for in Basic vs. Levinson still applies in this context and that the analysis under SABS 99 must include both quantitative and qualitative factors. But McCord pointed out that while it is not inevitable, it is very difficult to conclude that an error is immaterial when it is quantitatively significant. In this context, the SEC often ended up disagreeing with management and demanding a “Big R” restatement. On the other hand, the errors could be quantitatively small but qualitatively significant.
McCord also observed that in the context of the SPAC – where SEC staff had provided advice on warrants and equity classification that forced many companies to retreat – some companies attempted to use an argument of the “passage of time”, i.e. they argued that the errors in the financial statements were not really material because those old financial statements were not really important for the investors, who instead focused only on the latest financial statements. But, she says, investors aren’t just focused on current financial results; many also consider historical information. For example, an error pattern might lead to questions about reliability. Former Corp Fin chief accountant Mark Kronforst, back at EY, pointed out that you’re probably in the wrong place if your argument to the SEC is that financial statements aren’t important.