Major U.S. companies are downplaying financial restatements in reported efforts to ward off declining share prices or prevent clawbacks from executives, The Wall Street Journal reports.
Papa John’s was recently questioned by The Securities and Exchange Commission about why it didn’t reissue a report after its numbers were off by more than 5%. The pizza chain discovered years worth of accounting errors this spring, but decided the variance wasn’t enough to reissue finance statements to investors.
Despite rules developed in the early 2000s to alert investors to financial errors, the number of “Big R” restatements has fallen from 973 in 2005, to 119 in 2018, according to research reported in The Journal.
At the same time, the number of “Little r” revisions have grown from less than a third, to about three-quarters of the total restatements issued.
A joint study by the University of Arizona, Duke University and Indiana University reported companies are downplaying these changes to lessen the impact on share prices.
“Managers appear to be frequently using their discretion over how errors are corrected to avoid restatements,” Rachel Thompson, an assistant professor of accounting at the University of Texas at El Paso, told The Journal.
In her own study, Thompson found that 45% of Little r revisions between August 2004 and 2015 ticked at least one of the boxes to be classified as a Big R restatement. Thompson attributed that to the potential for companies to clawback compensation from executives if a Big R restatement is issued.
The SEC hasn’t made a big push against the rise of Little r statements. According to a separate study, the SEC looked at 2,748 errors between 2009 and 2015 that weren’t treated as Big R restatements, but only questioned 116 of them. Only one statement was later switched to a Big R. Read the full story.
