Treasury Targets Financial Fixes
Paulson Sets Study on Rise In Corporate Restatements And the
Impact on Markets
By Deborah Soloman
The Wall Street Journal
Friday, May 18, 2007
WASHINGTON -- Treasury Secretary Henry Paulson, concerned that
the number of corporate financial restatements has "soared" in
the past decade, has ordered a study into the cause of the
increase and its impact on investors and the U.S. capital
Mr. Paulson said restatements impose significant costs on
capital markets and can confuse investors and erode public
confidence in financial reporting. "When you have 1,500 or so
restatements in the course of a year, this is confusing to
investors and tells us that the system isn't working the way it
needs to be," he said.
The focus is part of a broader move aimed at reducing legal and
regulatory burdens that Mr. Paulson, backed by a chorus of
business executives, says are making the U.S. a harder place in
which to do business. While more steps are expected in the
coming months, for now the Treasury seems focused on finding
ways to ease financial-reporting requirements, largely by
relaxing rules that apply to the accountants who audit those
As part of that effort, Mr. Paulson wants a separate review of
the accounting industry by a special advisory committee that
would recommend changes, such as limiting the liability of
public accountants and reducing the concentration of auditors in
the hands of a few big firms.
Treasury officials and corporations are concerned that
accounting firms shoulder too much risk and, in turn, take an
aggressive approach to the companies they audit. That can lead
to financial restatements and make companies wary of taking
risks for fear of running afoul of auditors, said Mike Ryan,
executive director of the U.S. Chamber of Commerce's Center on
Capital Market Competitiveness.
"The reason auditors are taking a rigid approach is because they
are themselves exposed to very significant litigation. Until
that is addressed, auditors are going to be playing defense,"
Mr. Ryan said.
The Treasury's committee, which is expected to make
recommendations by year end, will be headed by former Securities
and Exchange Commission Chairman Arthur Levitt and Donald
Nicolaisen, a former SEC chief accountant.
Meanwhile, the SEC, in a move supported by Mr. Paulson, is
already engaged in a process to pare back the most debated
Sarbanes-Oxley corporate-governance rule, which requires that
companies have strong internal controls over their financial
reporting. The rule has drawn fire from businesses, which say
auditors are too strict in how they enforce the rule and require
them to document things not connected with preventing fraud or
Robert Steel, the Treasury's undersecretary for domestic
finance, said the moves are all aimed at improving financial
reporting so that investors get the most useful information
possible. In a speech before the Council on Competitiveness
here, he said the U.S. needs to take "a new approach" to
regulation and structure its rules so that regulators weigh
costs and benefits and focus on issues that are material to
Investor advocates say the efforts seem aimed more at weakening
the financial-reporting system. While the Treasury said the
number of restatements reached 1,876 in 2006, up from 116 in
1997, accounting experts say that is largely a result of tougher
accounting oversight that has helped uncover weaknesses and
problems investors are entitled to know about.
Lynn Turner, managing director of accounting-research firm Glass
Lewis, who has studied corporate restatements, said many of the
restatements didn't stem from minor problems or small errors.
Instead, he said, the rise is a result of companies being
forced, post-Enron, to examine their financial reporting and
"What we've gone through here is a period of some pretty
significant findings of things that need to be fixed, and that's
what's really driving the restatements," said Mr. Turner, who is
also a former SEC chief accountant.
With others, he worries Washington is on the cusp of pushing
corporate accountability back to pre-Enron days. "We have this
history of doing things, and when things start looking good, we
have very short memories, and then we pull back, and then along
comes the next implosion," he said.
Write to Deborah Solomon at