Accounting Deja Vu: Have We Seen These Earnings Before?
Mulford, Charles W.
Ely, Michael L.
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A study released by the GAO in October 2002, Financial Statements Restatements: Trends, Market Impact, Regulatory Responses and Remaining Challenges, reported that the number of restatements increased 145% from 1997 to 2001. In 2002, a study by Huron Consulting Group reported that the number of restatements increased an additional 22% over 2001. Both reports noted a growing presence of large companies making restatements. Many restatements move to future periods earnings that have been recognized previously. For example, a restatement entailing premature revenue recognition may result in deferral of that revenue for future recognition. Capitalized costs written down through restatement eliminate future amortization expenses. The net result of such restatements is that companies report the same earnings twice - once in prior years and then again in future periods. Not all restatements, however, affect future earnings. For example, restatements that eliminate fictitious revenue and assets do not move prior-year earnings to future periods. This report looks at the effects of restatements on future earnings. Our objective is to highlight selected restatements that were filed with the SEC during 2002 and early 2003 that will benefit future-period earnings by material amounts.