The Risks of Restatement
Restatement is the process of revising and distributing one or more of a company’s previously issued financial statements. Investors and creditors provide the capital for a manager to run a business. It’s critical that these stakeholders (as well as all other financial statement readers) are provided timely and accurate financial information.
Several events can damage a company’s relationship with users of financial statements. If the relationship is damaged, investors and creditors may pull capital out of the business or stop providing new capital.
Financial statements should be restated if the statement contains an amount that’s materially incorrect. By material, accountants mean an amount large enough to possibly change the reader’s assessment of the company’s financial condition. Here are some situations that may lead to restatement:
An error: An amount in the financials was posted in error.
Noncompliance with GAAP: If something in the financials doesn’t conform to GAAP, the amount may need to be restated.
Fraud or misrepresentation: If you took a business law class, you may have seen the term fraud. Generally, this term refers to willful intent to deceive. The same is true of misrepresentation. If fraud or misrepresentation is uncovered, it’s almost certain that the financials will be restated.
The bottom line with restatement is that it can impact the confidence that stakeholders have in your firm. An investor or lender may question whether the company is being properly managed. Those statement readers may have doubts about financial controls over the firm’s accounting records. The risk is that stakeholders take capital out of your company.