The recent restatement report from Audit Analytics reveals that the number of financial restatements has leveled off over the last three years. While this metric shows stabilization in financial statement errors, a deeper understanding of the different types of error corrections can produce additional insight.
Here are the three types of errors, in order of materiality:
- Non-Reliance Restatements – Previous and current financial statements can no longer be relied upon due to significant accounting errors, and they must be restated. An 8-K item 4.02 should be filed and the audit opinion should include a reference to the restatements.
- Revision Restatements – Errors made in previous financial statements do not undermine reliance on previous financials. Past financial statements must be restated; however, item 4.02 is not required, as past financials are still reliable.
- Out-of-period Adjustments – Errors in previous and current financial statements do not significantly affect past or present financials. Due to the low level of significance, these error corrections do not require a restatement. These errors are corrected through a one-time charge in the current period, and must be disclosed since corrections affect comparability between periods.
Audit Analytics defines a restatement as a correction of previously filed financial statements as a result of an error, GAAP misapplication, or fraud. Since out-of-period adjustments do not require a restatement, they are not included in the restatement report analysis. Supplemental analysis of out-of-period adjustment disclosures shows an increase of 37.02% between 2011 and 2012, with a notable increase in positive out-of-period adjustments.