Accounting is more of an art than science. This may come as a surprise to anyone who doesn’t work with (or write about) company accounts on a regular basis. Revenue, profit, cash flow, and just about every other accounting concept is open to pretty wide interpretation.
This can lead to both mistakes and misdeeds. Whatever the case, a company must restate its accounts if it’s caught publishing dodgy numbers. The impact can range from mild embarrassment to major scandal. Tesco’s £250 million ($402 million) profit misstatement is a recent example of the latter.
When internal finance staff, external auditors, or regulators spot a major accounting error at a listed firm, market rules require a fairly rapid public disclosure. But there are a range of more minor missteps that often go unnoticed by investors.
From next year, the UK’s Financial Reporting Council (FRC) will “name and shame” every company that it tells to adjust its accounts.
Out in the open
At the moment, for all but the most egregious cases, it is up to companies themselves to reveal that they were asked to change their accounts; most firms bury this news deep in the footnotes to financial reports, where few fear to tread. Or, as the FRC puts it, these actions are “generally known only to those who read the specific set of accounts in which they appear.”
In the year to March 2013 (the latest data available), the FRC reviewed 264 sets of accounts, asked for more information from 91 companies, closed 56 cases, and issued orders to restate accounts at nine firms. “Virtually all of our enquiries result in companies agreeing to make some change in their next reports and accounts,” the watchdog said (pdf).A handy one-stop shop for information that is otherwise shrouded in dense legalese.
The new policy won’t suddenly reveal juicy market-moving information, given that offending companies will only be revealed in the FRC’s annual report, which will probably come out long after a restatement is made. It will, however, flag that something might be amiss with the quality of a company’s internal controls or the aggressiveness of its accounting policies. It will serve as a handy one-stop shop for information that is otherwise shrouded in dense legalese.
And these sorts of financial snafus are hardly unique to the UK. In the US, listed companies issued nearly 10,500 accounting restatements between 2003 and 2012. Most of these adjustments are relatively minor and, like in the UK, disclosed in the darkest corners of financial reports. Some academics reckon that such “stealth restatements” are immaterial, but others are more suspicious.
In the UK, at least, investors will soon have a new way to see which companies’ accounts aren’t up to snuff, so that they can judge for themselves whether they should be worried or not.