What is a Restatement in Accounting?

A restatement refers to the revision and re-release of prior financial statements. A restatement is required whenever it is found that prior financial statements contain one or more material misstatements. There are a number of reasons why misstatements occur, including the following:

Accounting error. The business may have made any number of errors, such as in the calculation of revenues, the recognition of expenses, or the capitalization of assets.
Fraudulent financial reporting. The management team may have deliberately skewed the reported results of the enterprise; this is usually caught by its outside auditors, who report the matter to its board of directors.
Noncompliance with an accounting framework. The accounting staff of the business may have recorded business transactions in a manner that is noncompliant with the dictates of the accounting framework that the firm is supposed to be following, such as GAAP or IFRS.

When a publicly-held entity must restate its financial statements, it first files a Form 8-K to notify the investment community of the situation, and then issues replacement Forms 10-Q and 10-K, as applicable.

Impact of a Restatement

Businesses try to avoid restatements, since they are a public admission that an entity cannot create reliable financial statements. A common outcome of a restatement is a sudden decline in the stock price of an organization. Only a prolonged series of successful subsequent financial statement issuances is likely to reassure investors that the business is capable of producing correct financial statements.