Riding a Tiger without Being Eaten - RePub - Erasmus Universiteit ...

Restatements deal with misstatements of financial information and/or disclosures
in a company’s primary financial communication mechanisms. Understanding the
precise nature of the financial information distortion in itself is already a demanding
task, given the current complexities of financial accounting standards and the wide
topological variety in type of restatements, as Figure 1.7 (Simplified Typology of
Restatements) reveals.
However, both companies and financial analysts are expected to have adequate inhouse
financial expertise, which enables them to make judgments in the context
of restatement announcements and their subsequent follow-up communications.
We would expect that companies, particularly the CEO and CFO, would know what,
how, and when to communicate on restatement matters. Similarly, we would expect
financial analysts to be able to ask the ‘right’ questions and probe their sources
deeply enough to gather the information they need to assess the company’s nowrevised
financial position and assess its future performance potential.
Next, restatements not only imply that corrective financial disclosure actions need
to be taken; they require an explanation as to what caused them to happen in the
first place. Again, what makes this issue complex to judge is the ‘discretionary space’
available to senior management in selecting and applying accounting principles.
As can be seen in the current disclosures required to be made by management in
the ‘Management Discussion and Analysis‘ section of financial statements (or
comparable sections), management uses considerable judgment, and applies
significant estimates, in its application of accounting principles to financial
reporting. Therefore, along with the dimension of the ‘simple’ financial distortion,
is the dimension of management’s integrity and/or intent when using this
‘discretionary’ accounting space. This dimension is important as it will be the basis
for distinguishing accounting errors (unintentional), from accounting irregularities
(intentional misstatements). Unfortunately, in all too many cases, management did
not stay within the discretionary accounting space in issuing its financial statements,
but instead propelled its company into accounting and reputational limbo. Obviously,
applying judgment to this dimension of information supply (from the CEO and CFO),
and information demand (from analysts, auditors, and regulators) is a much more
tedious task.
Chapter 1 - Introduction and Historical Overview
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