Just What Do Restatements Indicate?
January 3, 2006
As 2006 begins, we again ponder the practical issues raised by Sarbanes-Oxley. If you are the Congress or SEC, how do you measure the effectiveness of rules focused on the adequacy of internal controls? How can the Congress assess whether public policy makers at the SEC and other agencies need to pursue more remedies or if the time to ponder instituting a degree of relief has arrived?� All public policy and certainly something as dramatic as Sarbanes-Oxley causes shock to a complex system of private enterprises. The data suggests a response steeped in panic and unfortunately costly in terms of compliance, an image enhanced by a media image of corporate misdeeds. Public policy efficacy needs to look at the majority of companies to gauge its worth, but the financial media has a bad habit of sensationalizing the bad actors. Supported by the data, we start with the hypothesis that most companies and their leaders turn out to be good economic citizens that�welcome the chance to improve. We must ask two questions about this hypothesis. One, following SOX, did companies respond by exhibiting behaviors consistent with the intent of the law? That is, did they clean up sloppy disclosure and take a hard look at systems and controls? Two, is there any indication that the quality of corporate governance for public companies is improving in the aggregate in the wake of all of this activity and expenditure? Using IRA's Corporate Monitor we look at the most dreadful consequence of them all, filing a material restatement that changes net income.
Instances of Corporate Financial Restatements
Source: IRA Corporate Monitor
Grant for a moment that most material restatements are clerical in nature. Notice the increase in material restatements as the worry over SOX cast its cloud over the country. In 2003 and 2004, a shock wave of cleansing can clearly be seen reacting to the law.
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