Rash of Restatements Rattles

Recent government prosecutions against high-level executives such as Tyco's Dennis Kozlowski, Worldcom's Bernie Ebbers, and Enron's Andrew Fastow and Jeffrey Skilling starkly underscore the penalties managers may face for playing fast-and-loose with accounting.

Meanwhile, auditing firms are starting to rotate staff, bringing in newcomers to take a fresh look at clients' accounting. Also, new rules handed down by the Financial Accounting Standards Board have prompted reassessments of past accounting methods, which can lead to earnings revisions reaching back five years (the period for which financial data is included in annual reports).

Another level of checks and balances on accounting shenanigans arrived last April when the SEC ruled that corporate audit committees must be composed entirely of members independent from the company itself. "Audit committees are getting more active and making sure that when they learn of problems, they're going to be dealt with," said Curtis Verschoor, an accounting professor at DePaul University.

In this environment of heightened scrutiny, however, the notion that a restatement was tantamount to a financial kiss of death has faded, too.

"We have now seen companies that issued restatements that have lived to do business another day," said Brotman. "The stock hasn't crashed; nobody's been fired or gone to jail; they haven't lost access to the capital markets; there haven't been any more shareholder lawsuits than there would have already been. If a company does a restatement early, fully and explains exactly what it is and why, it's not a lethal injection."

Meanwhile, corporate reform rules are being put in place that could lead to yet more accounting cleanups down the road. One provision will make companies find a way for whistleblowers to confidentially report possible wrongdoings, noted Verschoor.

Still, "the pendulum swings both ways," said Herrmann. "If the government continues to prosecute people in high-level positions, maybe that will last for a while. It probably will send a message and the fear of God will spread. But my guess is that politics being what it is, somewhere down the line the spotlight will be off and there will be fewer prosecutions."

A Round-Up of Recent Earnings Restatements Some firms are no stranger to the restatement dance
Company	Financial Scoop	Number of restatements in past year
Bristol-Myers Squibb (BMY:NYSE)	Restating fourth-quarter and full-year results for 2003 due to accounting errors. Follows an earlier restatement of earnings between 1999 and 2002, as of early 2003	Twice
P.F. Chang's China Bistro (PFCB:Nasdaq)	Will delay filing its 10K; plans to restate earnings for prior years, including for calendar year 2003	Once
Veritas (VRTS:Nasdaq)	Will restate earnings for 2001 through 2003	Once
Nortel (NT:NYSE)	Will restate earnings for 2003 and earlier periods; Nortel already restated earnings for the past three years in October 2003	Twice
Metris (MXT:NYSE)	Restated its financial results for 1998 through 2002 and for the first three quarters of 2003 following an SEC inquiry	Once
Quovadx (QVDX:Nasdaq)	Restating results for 2003	Once
WorldCom	Restated pretax profits from 2000 and 2001; this month former CEO Bernie Ebbers indicted on fraud charges in accounting scandal that led to 2002 corporate bankruptcy	Once
Service Corp. International (SRV:NYSE)	Restating results for 2000 through 2003	Once
Flowserve (FLS:NYSE)	Restating results for 1999 through 2003	Once
OM Group (OMG:NYSE)	Restating results for 1999 through 2003	Once
IDX Systems (IDXC:Nasdaq)	Restated results for 2003	Once
Network Associates (NET:NYSE)	Restated results for 2003 this month; restated earnings for periods from 1998 to 2003 after investigations by the SEC and Justice Department	Twice
Take-Two (TTWO:Nasdaq)	In February, restated results from 1999 to 2003 following investigation by the SEC	Once
Sipex (SIPX:Nasdaq)	In February, restated results from 2003, marking the second revision of third-quarter '03 results	Twice
Source: SEC filings, media reports.

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