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Restating Restatements

With AS5, auditors will have to speak plain English on errors

By Staff Writer | Updated on March 01, 2008

Financial statements will be a little clearer, and investor relations departments should be a little less besieged at annual report time thanks to a new rule adopted last month by the Public Company Accounting Oversight Board (PCAOB). Auditing Standard No. 6, if approved as expected by the Securities and Exchange Commission (SEC) later this year, will require auditors to state clearly in their note at the end of company reports whether any correction of corporate financial statements was the result of an earlier error or misstatement–or simply a change in accounting rules.

Corporate finance executives and investors alike have complained that under the old rule, auditors did not have to distinguish between the possible reasons for changes, except in hard-to-locate and sometimes hard-to-decipher footnotes, leaving worried investors wondering whether there had been a mistake or cover-up. The new rule also redefines the term “restatement” to apply only to the correction of errors, and not to adjustments resulting from changes to accounting rules.The AS6 change puts auditors in synch with company accountants, who have been working under Financial Accounting Standards Board (FASB) Statement No. 154, which states that the term “restatement’ only applies to changes required to actually correct errors.

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