One in 10 publicly traded companies made financial restatements because of accounting irregularities in the past five years, the U.S. General Accounting Office said Wednesday. Annual restatements from accounting irregularities will increase 170 percent to a projected 250 by the end of 2002 from 92 in 1997, according to the report.
The report cited weaknesses in corporate management at the restating companies, with auditors and boards of directors failing in their roles, along with securities analysts and credit rating agencies that did not find problems in time.
The GAO report showed the restatement trend began earlier than the spectacular 2001 implosion of Enron Corp. and this year's WorldCom Inc bankruptcy, with 1999 restatements jumping 71 percent to 174 from 102 in 1998.
Sen. Paul Sarbanes, who requested the report, said the findings made it more important than ever that the Securities and Exchange Commission name persons of integrity to a new accounting oversight board set up under the Sarbanes-Oxley Act, the biggest shake-up of U.S. securities laws since the 1930s.
The SEC has until Oct. 28 to choose five members, but the effort has become mired in controversy over whether SEC Chairman Harvey Pitt offered chairmanship of the board to pension fund veteran John Biggs, only to withdraw it after lobbying against Biggs by the accounting industry.
“From January 1997 through June 2002, about 10 percent of all listed companies announced at least one restatement,'' said the GAO, the audit arm of Congress.
The restatements cost investors billions — an average of almost 10 percent of their stock value in the short term, from the day before to the day after the restatement, said the GAO.
“The results of this probe demonstrate that investors have suffered significant financial harm when the public companies in which they invested misrepresented their financial condition and later restated their financial statements,'' said Sarbanes, the Maryland Democrat who co-sponsored the landmark reform laws that cleared Congress in July.
The Securities and Exchange Commission said Tuesday it had filed 598 enforcement actions for fiscal year 2002, which ended Sept. 30, a 24 percent jump from 484 the year before.
SEC actions involving misrepresentation of financial statements and other disclosures leapt 46 percent to 163 in fiscal 2002 from 112 a year earlier.
GAO said the size of companies restating their books is growing, with the median size of companies making restatements as measured by market capitalization increasing to $2 billion in 2002 from $500 million in 1997.