Audit Analytics has just posted its 2021 annual review of financial restatements, which this year covered a 21-year period. The review showed a 289% increase in the number of restatements to 1470, the highest level of restatements since 2006.   You may have guessed that the increase was attributable to restatements by SPACs.  Excluding SPACs, the numbers actually reflected a 10% decrease in the number of restatements year over year. SPACs also account—largely but not entirely—for a large increase in the proportion of reissuance (“Big R”) restatements.  Audit Analytics found that 62% of restatements were reissuance restatements, the biggest proportion since 2005. But even excluding SPAC restatements, 24% of 2021 restatements were reissuances, an increase from 2020 of three percentage points.

In 2021, SEC guidance addressing SPAC accounting for warrants and classification of redeemable equity resulted in significant increases in the number of restatements, especially reissuance restatements.  According to Audit Analytics, of restatements by SPACs or companies acquired by SPACs, 35% related to redeemable shares (over 500 companies) and 42% related to warrants (over 600 companies). As a result of the many new SPAC registrants, the number of SPAC restatements pushed the “percentage of unique companies that disclosed a restatement to 12.7%, slightly trailing the 13.6% high point observed during 2006.”

Audit Analytics observes that, while recently, the proportion of restatements filed by foreign private issuers had been increasing, in 2021, this trend reversed, in part, because of the substantial proportion of restatements by domestic SPACs.

Audit Analytics also looked at the impact of restatements on reported net income. For 2021, 26% of restatements had a negative impact on net income; however, excluding SPACs, 32% of restatements had a negative impact on net income. 

In terms of “severity” of the restatement, in 2021, there were 1.85 issues per restatement on average (1.4 excluding SPACs), compared with an average of 1.52 last year.   In addition, 33% of restatements (61% excluding SPACs) involved an annual report (which include audited financial statements), compared with 58% in 2020.  In 2021, the average restatement period was about 300 days (about 500 days excluding SPACs). The disclosure window (the time between announcement and filing) was about 10 days in 2021 (about 30 days excluding SPACs). 

Among domestic companies in 2021, 73.1% were non-accelerated filers, 4.5% were accelerated filers and 10.2% were large accelerated filers.  The top accounting issues in restatements, excluding SPACs, were debt and equity securities (19.1%), revenue recognition (12%), liabilities and accruals (11.7%), expenses (10.9%) and taxes (8.8%).  Including SPACs, debt and equity securities were issues among 80.4%.

Posted by Cydney Posner