Let’s just say it: no company likes to restate its financial results, and for good reason. However, today’s dynamic regulatory environment, the growing complexity of accounting standards, and changing business activities are just a few of the factors that may increase the risk of restatement. Such factors clearly heighten the restatement risk, but the most central drivers behind a restatement are often poor oversight or a breakdown in internal controls.
Whatever the initial problem, companies should focus on the solution, and quickly. News of a restatement can affect the company’s reputation, shareholder value, and capital market transactions. So the sooner the process begins, the better.
Publicly traded companies have four days from the time they confirm a restatement is needed to announce it in a Form 8-K, and many things need to happen before that announcement, including discussions between senior management, the external auditor, the full board, and counsel; initial assessment of the issue or issues and magnitude; and coordination with the investor relations team. So the most critical first step in a potential restatement scenario is to assemble that small group of essential experts to determine if a restatement is truly needed.
If outside restatement experts are not already involved, they should come in now. It’s extremely important to bring in folks who have been there, done that. You can decide how much or little to rely on your advisors, but first get their perspective, as once the restatement is announced, a longer and more detailed review process begins.
Of course, the day-to-day activities of the company must go on and, unless the company brings in outside help, the restatement process can severely strain internal staff. Experienced advisors can assist you in correcting the accounting and assuring compliance with SEC and market rules. They can also assist in assessing the internal control process, identify data requirements, and advise on other concerns.
Proper project management also is of utmost importance. Experienced advisors offer tremendous assistance to you in establishing clear communication channels between stakeholders inside and outside the company. Regular status meetings, including regular board briefings, are essential.
To get your process started, let me offer a few tips:
Don’t Go It Alone. For a variety of reasons, some companies try to manage the restatement process without outside help. They often fail and sometimes make the situation worse. It’s best to work with an outside advisor to get the restatement completed quickly, accurately and within all legal and regulatory requirements.
Enhance The Team. Months of detailed accounting reviews, complex communications, possible legal issues, board discussions and other matters could burn out existing staff. The time to bring in help is right at the start.
Don’t Make Another Mistake. It’s remarkably easy to make another mistake. This is another argument for bringing in third-party experts who can review your accounts and processes with fresh eyes. An error on a restatement could mean, yes, another restatement.
The best piece of advice is the simplest. At the first hint of a restatement, commit yourself to getting to the bottom of it as quickly as possible so that your team can do what it does best: run the business in a way that benefits your customers, employees and shareholders.