Assignment 1: Financial Statement Restatement and Ethics
Assignment 1: Financial Statement Restatement and Ethics
The change in the financial statements after the issuance of the financial statements is an adverse signal for the investors and other key stakeholders of the business. According to Wahlen, Baginski & Bradshaw (2011), the main reason of the restatement of the financial statements of the business is to provide true and fair view of the financial statements by following the ethics and the reporting standards.
It is the duty of the directors of the business to prepare the financial statements accurately and on a timely basis for the user of the business. Moreover, the financial statements can be revised if the error or misstatements are found during or after the issuance of the financial statements. The main factor which affects the financial statements and force the directors is the material misstatement or error found by the external auditors. The suggestions of the external auditor are accepted by the directors of the business because it is according to the guidance of business ethics and international accounting standards such as IAS, IFRS and US GAAP. ("Restatements")
Another important factor which is important to disclose in the financial statement is that any subsequent event which is relevant to the shareholders in terms of future investments, as per the article published by EY, Financial restatements: Understanding differences and significance (2015). Moreover, if the subsequent event is found and financial statements are not issued, then it is the responsibility of the management to disclose this event in special notes. Another important factor is that if there is any material and complex amount which is wrongly calculated and disclosed, must be revised. The complex accounts such as pension, deferred tax and actuary must be maintained by the experienced staff members to minimize the chances of revision of financial statements. ("Financial restatements: understanding differences and significance")
The reasons of the restatement of the financial statements drive the movement of the share price on the stock exchange. According to the experts, changes of wrong implementation of the accounting standard is not the main cause of the change of stock valuation in the market. However, if there is any relevant news or signal which is adverse, then it is highly probable that the share price in the market will fall. ("Financial Restatements and Market Reactions")
For example, if the management of the business changes their depreciation method from cost model to revaluation model and the restatement shows significant increase or decrease in the valuation of the assets, then this change will not affect the price of the shares in the market. However, if the restatement is due to any uncertain reason, such as fire in the warehouse which damaged and destroyed the inventory, can affect the price of the share. Furthermore, if the restatement is done because of the cash problems and any important director leave the office, then the combination of both events will affect the share price. (Wahlen, Baginski & Bradshaw, 2011)
The restatement of financial statements was used as a tool for safety by the management of the organization to keep their company’s stock price at a reasonable level. The directors used to misstate the amounts unethically and then restate the financial statements after a few months of issue. The Sarbanes-Oxley Act reduces the chances of unethical business practices of the directors of the business by the introduction of the internal controls and the non-executive directors of the companies. (Prentice, Robert, & Bredeson, 2011)
The Sarbanes-Oxley Act suggest that the listed companies must have the internal audit department which reports to the non-executive directors and the audit committee and recommend the committee about the possible solutions of the ethical issues concerning restatements of financial statements, as described by Mintz (2015). Moreover, the non-executive directors and the audit committee inspects every transaction and the course of business within the organization and inform the NED’s when they discover any unethical event.
The non-executive directors assigned as per Sarbanes-Oxley Act are industry experts and they can inform the executive board on the issues which are neglected by them to reduce the chances of restatement of the financial statements. (Mintz)
The management of any business must identify the risk areas of the financial statements before compiling the financial statement. After identification of the riskiest areas, the management must adopt the professional skepticism and due care towards the preparation of the financial statements to minimize the chances of restatements. (Wahlen, Baginski & Bradshaw, 2011)
References
Restatements. Retrieved January 17, 2016, from
http://www.pwc.com/us/en/audit-assurance-services/accounting-advisory/restatements.html
Financial restatements: Understanding differences and significance. (2015, May 1). Retrieved
Wahlen, J., Baginski, S., & Bradshaw, M. (2011). Financial reporting, financial statement and
valuation: A strategic perspective (7th ed.). Mason, OH: Cengage Learning.
Prentice, Robert, & Bredeson, Dean (2011). Student guide to the Sarbanes-Oxley Act: What
business needs to know now that it is implemented. Mason, OH: South-Western Cengage Learning.
Financial Restatements and Market Reactions. (2008, March 1). Retrieved January 17, 2016,
Mintz, S. (2015, December 5). Has the Sarbanes-Oxley Act let to a Reduction in Financial
Statement Restatements? Retrieved January 17, 2016, from http://www.ethicssage.com/2015/05/has-the-sarbanes-oxley-act-let-to-a-reduction-in-financial-statement-restatements.html
