Q&A Series: When Your Public Company Must Restate Its Financial Statements



Q: In the course of doing this year's audit, our independent auditor found a problem with our previously issued financial statements. What do we do now?

A: You need to know more. You do not have to restate your financial statements unless they are materially wrong, although bear in mind that the Securities and Exchange Commission (SEC) has said that materiality can be “qualitative” as well as “quantitative.” See Staff Accounting Bulletin No. 99.

Work through the potential issues and determine what, if anything, needs to be restated. Be sure that your independent auditor considers possible accounting alternatives to a restatement, like a cumulative catch-up. Also, you need to understand why the problems occurred; evidence of fraud, for example, will surely call for additional action. Once you have reason to believe that there is a material error, you should shut down trading in the company's securities by insiders. You may also have to suspend outstanding shelf registration statements, if there are any.

Other questions include:

*Okay, after reviewing everything, the Audit Committee has indeed concluded that some of our previously issued financial statements should no longer be relied on. And, it looks like we are going to be delayed in filing our Annual Report on Form 10-K. What do we do?

*What if we cannot file our periodic reports within the Rule 12b-25 grace period?

*What happens when my periodic reports are late?

*What else do I need to be thinking about during this process?

Please see full alert for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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