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Restatements: Potential Causes and Severe Ramifications

  Arthur F. Rothberg, Managing Director, CFO Edge, LLC  
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  Article Summary  
Though the number of financial restatements has decreased somewhat since 2007, the overall number has risen dramatically over the past decade. Passage of the Sarbanes-Oxley Act in 2002 significantly increased the severity of rules and regulations related to corporate governance and accounting, which in turn has led to a marked increase in the number of restatements.

This article provides an overview of restatements by defining them, describing how they can be viewed by analysts and investors, and looking at the pressure they can put on accounting departments.

Also examined are causes of restatements that may include incorrect revenue recognition, a lack of operational transparency, corporate fraud, or misapplication of GAAP. In fact, a Securities and Exchange Commission (SEC) study conducted in April 2011 found that 80 percent of all restatements that occurred in 2009 were the result of misapplied GAAP.

Restatements can cause significant harm to a company’s reputation. Los Angeles CEOs and CFOs who feel that their accounting department is not equipped to accurately manage changing GAAP, or who are faced with having to submit a restatement, may consider engaging a CFO services firm that can provide expert advice on navigating difficult GAAP terrain.

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