Corporations are suffering from a severe case of restatement fatigue. Last year 10% of public companies, some 1,244, had to correct their financials, up from less than 1% a decade ago. "Did all of these [companies] get it wrong because they were incompetent, lazy, or engaging in fraud?" says Robert C. Pozen, chairman of MFS Investment Management, a public mutual fund firm. "I don't think [so]."
Of course, management is blaming the onerous rules of the 2002 Sarbanes-Oxley Act (SarbOx), which beefed up disclosure. But now companies also are blasting regulators. They contend officials at the Securities & Exchange Commission and others are capriciously reinterpreting rules or using ambiguous or inappropriate tests for problems--all of which has forced a flood of unnecessary and costly restatements. As a result, the movement to lighten the SarbOx burden has evolved into a broader push for dramatic accounting reforms.
Leading the charge are two prominent groups of business leaders, the Committee on Capital Markets Regulation, a group endorsed by Treasury Secretary Henry M. Paulson Jr., and the Commission on the Regulation of U.S. Capital Markets in the 21st Century, sponsored by the U.S. Chamber of Commerce. Advocacy group Financial Executives International has also joined the fray, calling for the Financial Accounting Standards Board, which sets principles for companies, to stop issuing new rules and instead simplify existing ones.
It's not clear how much power the groups will have to force change. Corporate misdeeds continue to surface. In March, Dell Inc. (DELL) reported that it had discovered financial "misconduct." Some critics also question the merits of the groups' arguments and say some of the proposed changes could open the door for accounting shenanigans. Still, their voices are being heard. Amid the dissent, the SEC convened a special meeting on Apr. 4 to rein in SarbOx.
Among the biggest complaints: SEC rulemakers are recklessly handing down new orders by fiat. The chamber's panel points to a 2005 letter from Donald T. Nicolaisen, then the SEC's chief accountant. The groups assert it reinterprets the accounting rules on leases. Nearly 250 restatements resulted--proof, they say, of regulators run amok.
'WRONG WAY TO GO'
Yet Nicolaisen says he only reviewed the standards and wrote the letter at the behest of corporate auditors. "The accounting literature has been in place for a long time, but it wasn't being followed," says Nicolaisen, now retired.
The panels also take issue with a 1999 Staff Accounting Bulletin, a paper detailing the SEC's views on disclosure of mistakes. In it, the panels contend, the SEC threw out a "rule of thumb" in which errors that amounted to less than 5% of net income are immaterial and don't have to be corrected. By doing so, the groups say, the staff made the threshold too subjective. One committee wants to establish a general 5% benchmark.
Critics of the panels--who say there have never been hard and fast rules about what's material--believe a 5% standard would invite more problems. Some companies have used it to hide their sins. In 1998, former Fannie Mae (FNM) executives didn't book an expense worth 4% of income on the grounds it wasn't material. That allowed top brass to bank their bonuses. Georgia Institute of Technology professor Charles W. Mulford says sanctioning a 5% test today "would be absolutely the wrong way to go. We've done that, and it's not right."
Meanwhile, investors aren't that upset over restatements. Stock prices don't take the same hit after a correction now that the practice is more common. And they see restatements as a good source of information. Says Neri Bukspan, chief accountant for credit-rating agency Standard & Poor's (MHP): "Errors should be corrected."
By David Henry