The Risks of Restatement
* psst we’re gonna talk about something nobody in your finance department wants to talk about, so we’ll be quiet about it…. pretend we’re not here … or that we’re talking about warm sand beaches and soft, rolling tides or something *
For the non-finance folks in the IT space who are reading this, let’s table set. Whenever the talk is around revenue management solutions, ASC 606, the SEC or the critical needs of compliance, the worst-case scenario is always a restatement. Is it really that bad?
In a word: Yes.
In more words, here’s why…
A material restatement, or revision of one or more of a company’s previous financial statements to correct an error, can have a devastating – and often lengthy – impact on a company, both internally and externally.
Take the real-life example of Molson Coors Brewing Co., the maker of brands including Coors Light and Blue Moon beer. In 2019, the company announced it was issuing restatements for fiscal years 2016 and 2017, the result of accounting errors from its 2016 acquisition of the remaining majority stake in MillerCoors. The post-restatement financial results included nearly $250M in understated taxes owed–plunging quarterly sales–and a stock drop of 6.5%.
Given that corporate management is typically in regular communication with various stakeholders and regulators on earning calls, external impacts of a restatement can be twofold: (1) There’s the measured decline via stock price as a result of delivered earnings content and (2) a loss in investor confidence.
How long this negative impact might last, of course, can vary, given the fluid and non-measurable nature of a lack of consumer confidence. While studies have indicated the stock price impact tends to show recovery in approximately 9 months, or three quarters, the measured impact from a loss of financial credibility tends to be more drawn out, lasting closer to three years.
Long-lasting effects, indeed. However, let’s not discount the impact of a restatement to the inner workings of a corporation. Given all the filings and timelines required by the SEC, this process is significantly challenging to an accounting department balancing their day jobs along with the high-priority responsibility of calculating, correcting and reporting the named error. And, given the technically complex nature of a restatement, company management may determine in-house resourcing lacks the expertise to tackle such a task, choosing outside help. So now you’re looking at additional costs for external advisors in addition to counsel and auditor needs.
How can companies best protect themselves from this potentially catastrophic end result?
The corporate areas most prone to restatement are the following:
- Revenue recognition errors
- Equity transaction reporting mistakes
- Complex rules related to acquisitions, investments and tax accounting
- Valuation errors related to common stock and preferred stock
- Income statement and balance sheet misclassification
The two-headed focus words are prevention and mitigation, and in each case, it’s important to understand what causes a restatement in the first place.
Ensure your organization employs the right staff with full knowledge of the in’s and out’s of these named areas of potential issues, provides regular in-house training, includes access to appropriate specialists and establishes a strong set of internal controls to support these processes.
If you feel your in-house resources are lacking in any of these areas, look to bring in outside accounting expertise (in comparison to the earlier mention of additional costs for these outside services, this preventative spend can often save exponentially). In addition, make sure your company stays current with all changes to the organization, transactions, accounting and regulatory rules to prevent. Such changes left unattended to are a prime catalyst for the ‘li’l error that could’ create a restatement. Don’t be that organization.
* ok, finance folks, you can uncover your eyes now … we’re done *
To learn more about how the right revenue management solution can help prevent this result, contact us today to discuss RecVue’s technologically advanced and flexible order-to-cash solutions.