Financial Statement Restatements
Mistakes happen. If you find yourself looking at a potential restatement of the financial statements, it’s important to act swiftly and carefully to get the accurate information out there.
Any suspicion that a past accounting mistake has been made can create a sinking feeling—even more so when the finance team confirms that a significant mistake was made that materially affected the veracity of publicly shared financial statements. Having to go through the process of restating prior year financial statements can be arduous for the accounting team involved, as they need to retrace steps to see how far the problematic financial statements go, investigate how the error occurred, and minimize the risk of restating prior year financial statements in the future.
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But first, there is a limited window in alerting investors to the problem—even, potentially, before you know how to fix it. Companies have four days to file an 8-K once they’ve discovered the need for a financial restatement. This SEC filing lets investors know that previously issued financial statements can no longer be relied upon and that a financial restatement is forthcoming.
Time is of the essence during the entire process for financial statement restatements as the company needs to meet the expectations of more skeptical investors, auditors, and the SEC. Under heightened scrutiny, no further mistakes can be made as the company works to regain trust and provide everyone with further explanation and updated information.
For the topic of financial statement restatements, we have the real-world example of a publicly traded benefits administrator that discovered it needed to restate two years worth of financial statements because of errors. The extensive work that followed included the meticulous correction of 300 journal entries before new, audited financial statements could be resubmitted to the SEC.
A sense of panic is natural when a company first determines or suspects it has a financial statement restatement issue to deal with—but finance and accounting experts who have helped many companies through the process can ease the stress and make sure the restatement gets done right.
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Whether the underlying issue was an honest mistake or a fraudulent error, a company can benefit from finance pros’ fresh perspective and steep experience with financial restatements to ensure that the research into the problem is thorough and the corrections made are airtight. In the situation involving the benefits administrator, a RoseRyan team was dispatched to track and manage the entire restatement process. Since this is not an everyday occurrence, companies rarely have someone on their own team who knows exactly what to do.
For this client, we were there throughout the financial statement process to help verify and correct all accounts and complete the amended SEC filings. Throughout the course of the nine months it took to get everything done, we tracked the ongoing restatement impact to the financial statements on a template we had created. As with most companies, the benefits administrator felt the pressure to be not just timely in its response but thorough. Adding to the stress was executive turnover, accounting team changes, and a changeover in the firm the company had relied on for its external audits.
Whether there’s a need at your company to have a restated balance sheet or another financial statement restated, RoseRyan finance and accounting experts will be a supportive force throughout the process. They’ll keep everything moving on time, through the final step of when you’ll have restated audit financial statements in hand.
The company needs to know they can rely on finance and accounting experts who have their back the entire time and will help them think of everything—from pay careful attention to restated accounts, meeting important deadlines, assessing Sarbanes-Oxley controls, training on new software or processes if necessary, and preparing documentation that’s audit-ready for any restated journal entries.
Who initiates a financial restatement?
Anyone who notices an error can initiate the need for a financial restatement. A past mistake may be noticed by chance by someone on the finance team, for instance, or it may come to light as future financial statements are being finalized.
How long does it take to restate financial statements?
The average restatement process takes between a little over three months to nearly 90 days, but overly complex restatements can require several months before the issue is resolved.
Are there negative implications associated with financial restatements?
A financial restatement is generally not considered a positive event; however, investors may appreciate when a company is forthcoming and timely in fixing any past mistakes.
What are some reasons a company would restate their financial statements?
The top issues for restatements, according to a 2021 Audit Analytics report, were revenue recognition, debt and equity securities, liabilities and accruals, tax matters, and general expenses.
Once you’ve taken a deep breath and accepted there’s a problem that needs to be tackled, and reached out to experts who can support you every step of the way, here’s what to expect:
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The entire restatement process, which is likely to take up several weeks, has to occur at the same time everyone is trying to do their day job and keeping the business running. Depending on the complexity of the financial restatement, some companies need to also bring in extra help to keep the day-to-day accounting responsibilities covered.
Finance and accounting experts can help to determine, from both a quantitative and qualitative standpoint, whether the error is material, and thus necessary to move forward with a restatement of the financial statements.
Was the error intentional or an honest mistake? Can it be traced to just one transaction, or was it a pervasive problem? The more complex and pervasive, the more work that will need to be done as the company retraces past missteps.
A dedicated team and a plan will keep the process on track. Specialized resources, such as experts with technical accounting skills, may be needed along the way.
Your external auditors will be on high alert as they review the financial restatement. Knowing this ahead of time, the company may want to rely on an external audit liaison to respond to any inquiries and ensure that documentation is sound.
A material weakness in one of more controls is likely to be revealed during the financial restatement process.
A footnote to the restated interim and annual financial statements will need to acknowledge the error correction and the story behind it. The expertise you’ve brought in can help to ensure that this footnote is properly worded and that the company is prepared to address any comments or questions from the SEC afterward.
The restatement process puts a relentless strain on in-house finance teams. Experienced pros can assist with project management, navigate all aspects of the process, correct the accounting, ensure compliance with regulatory requirements, assess internal controls and remediate underlying issues.
Drop us a note in the form and one of our experts will set up a time to discuss the ways RoseRyan can help your business go further, faster.
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