In November 2021, Audit Analytics posted its 20-year review of restatements, showing that the number of “Big R” reissuance restatements in 2020, the last year of the review, was at a record low. According to the report, there were “81% fewer restatements in 2020 than the high in 2006 and 26% fewer than 2019.” Notably, however, while in 2005 reissuance restatements represented the majority of restatements, in 2020, reissuance restatements represented only 24.3% of restatements; revision restatements represented 75.7% of all restatements. At yesterday’s Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, Lindsay McCord, Corp Fin Chief Accountant, raised a question: were companies being properly “objective” in assessing whether a restatement should be a “Big R” or “little r” restatement?
[Below based on my notes, so standard caveats apply.]
At SRI, the accounting panel emphasized that the test of materiality set forth in Basic v. Levinson still applies in this context and that the analysis under SAB 99 must include both quantitative and qualitative factors. But McCord stressed that, while it’s not inevitable, it’s very difficult to conclude that an error is immaterial when it is quantitatively large. In that context, the SEC often ended up disagreeing with management and requiring a “Big R” restatement. On the other hand, the errors could be quantitatively small but material from a qualitative perspective.
McCord also observed that, in the SPAC context—where the SEC staff had provided guidance on warrants and equity classification that required many companies to restate—some companies attempted to use a “passage of time” argument, that is, they contended that errors in financial statements were not really material because those old financial statements were not really important to investors, who were instead focused only on the latest financial statements. But, she said, investors aren’t focused on only the current financial results; many also consider historical information as well. For example, a pattern of error could lead to questions about reliability. Former Corp Fin Chief Accountant Mark Kronforst, how back at EY, observed that you’re probably not in a good place if your argument to the SEC is that the financial statements are not important.