What happened with the financial restatements in 2021? | Cooley LLP
Audit Analytics has just published its 2021 annual review of financial restatements, which this year covered a period of 21 years. The review showed a 289% increase in the number of retreatments to 1470, the highest level of retreatments since 2006. You may have guessed that the increase was attributable to retreatments by SPACs. Excluding SPAC, the numbers actually reflected a 10% decline decrease the number of restatements from one year to the next. SAVS also explain – largely but not entirely – a large increase in the proportion of remission (“Big R”) restatements. Audit Analytics found that 62% of restatements were reissue restatements, the highest proportion since 2005. But even excluding SPAC restatements, 24% of 2021 restatements were reissues, an increase of three percentage points from to 2020.
In 2021, SEC guidance regarding accounting for SPACs for warrants and classifying redeemable shares resulted in a significant increase in the number of restatements, particularly reissue restatements. According to Audit Analytics, of the restatements made by SPACs or companies acquired by SPACs, 35% concerned redeemable shares (more than 500 companies) and 42% concerned warrants (more than 600 companies). Due to the many new SPAC enrollees, the number of SPAC restatements pushed the “percentage of unique companies that disclosed a restatement to 12.7%, down slightly from the high of 13.6% seen in 2006”.
Audit Analytics observes that while recently the proportion of restatements filed by foreign private issuers had increased, in 2021 this trend has reversed, in part, due to the large proportion of restatements by domestic SPACs.
Audit Analytics also examined the impact of restatements on reported net income. For 2021, 26% of restatements had a negative impact on net income; however, excluding SPAC, 32% of restatements had a negative impact on net income.
In terms of the “severity” of the restatement, in 2021, there were 1.85 issues per restatement on average (1.4 excluding SPAC), compared to 1.52 on average last year. In addition, 33% of restatements (61% excluding SPAC) concerned an annual report (which included audited accounts), compared to 58% in 2020. In 2021, the average restatement duration was around 300 days (around 500 days excluding SPAC). The disclosure window (the time between announcement and filing) was approximately 10 days in 2021 (approximately 30 days excluding PSPC).
Among domestic companies in 2021, 73.1% were non-accelerated filers, 4.5% were accelerated filers, and 10.2% were large accelerated filers. The main accounting issues in restatements, excluding SPAC, were debt and equity securities (19.1%), revenue recognition (12%), liabilities and accrued charges (11.7%), expenses (10.9%) and taxes (8.8%). Including the SPACs, the debt and equity securities were issued at 80.4%.