LeaseQuery named #1 Lease Accounting Solution 3+ Years in a Row

Restatement of Financial Statements under IFRS 16 and ASC 842: What’s the Impact to Public Companies?

by | Jul 17, 2018

As the deadlines for FASB 842 and IFRS 16 get closer, many companies are realizing just how time-consuming and resource-heavy the transition process is (this 12-step guide will walk you through the lease accounting transition process). After all, you have to interpret and apply the new standards while also performing your core job duties.

On top of that, you may not have the time, resources, or money to invest in your transition. Whether you’re trying to convince senior leadership to free up budget or if you’re feeling overwhelmed about the process, there’s a lot at stake. The new lease accounting standards represents one of the biggest regulatory change in over 40 years. Devoting ample time and resources is essential to compliance.

If you’re found to be noncompliant and have to restate your financials, that will create a ripple effect that requires costly auditing, consulting, and legal fees, opens up your company to further scrutiny, and may even put your career in jeopardy. Let’s take a closer look at what happens when public companies have to restate their financials.

Restating your financials is expensive

The cost to reissue your financial statements is hefty. Not only will you have to file SEC form 8-K and amended 10-Q forms (as well as 10-K forms, depending on how widespread the errors), you’ll also have to reissue an audit report for that year. That means you’ll have another audit bill and that’s nothing to sneeze at. The median audit fee for public corporations is $2.8 million.

In addition to auditors, consultants and lawyers have to get involved to identify what went wrong and address any potential legal issues. While some of those resources may be internal, many of them will come from outside the company. Those costs can add up to tens of thousands, sometimes millions, of dollars.

When Hertz had to restate its 2015 financials, it noted in its 2014 10-K that it incurred $30 million in consulting, auditing, and legal costs associated with the restatement and investigation activities.

It breeds uncertainty amongst shareholders

According to the Wall Street Journal, companies lose an average of 25% of their market value after a restatement or fraud.

Shareholders need to know that the leaders of the company they’ve invested in are making sound financial decisions. Even though a failure to comply with FASB 842 and IFRS 16 doesn’t amount to a scandal on the scale of Enron or WorldCom, the memory of those scandals has made investors understandably weary about companies that don’t properly manage their finances.

They put their money on the line to invest in your business. Having to restate your financials undermines their confidence in your organization’s ability to provide a high return on that investment. That uneasiness may result in a sell-off and lower your stock price.

Restatements invite SEC scrutiny

In a 2015 statement, the SEC’s Division of Enforcement Director said that “adequate internal controls are the building blocks for accurate financial reporting and can prevent fraudulent activity.” As the SEC grows increasingly proactive in its approach to identifying fraud, they have cited internal control issues more and more often in their enforcement actions, even when those actions did not involve fraud.

The SEC’s antenna is up, and restating your financials puts your company on their radar. If independent auditors find a material weakness or significant deficiency in your internal control environment, any disclosures you file related to those issues will be scrutinized by the SEC.

Public relations will go into overdrive

To keep the investor community and the general public informed about the restatement and the ensuing investigation and corrective measures, you’ll need a communications plan. You’ll have to develop your messaging, issue press releases, and respond to media inquiries.

Your company may already have PR professionals on staff, but they often have to secure outside help to deal with situations that are outside the norm. That’s another costly resource to manage.

Senior financial leaders and internal auditors will suffer professionally

The most egregious accounting errors lead to senior finance leaders losing their jobs. Even when the recourse isn’t that serious, they can be demoted and have their reputations tarnished.

The internal auditor may also be fired or demoted, especially if you have to issue another audit report. Accountants are expected to be technical and accurate all the time. If we make mistakes that are big enough to warrant a restatement, then it reflects poorly on our attention to detail and ability to properly interpret regulatory guidance.

Present Value Calculator

Prepare for compliance today so you won’t have to restate your financials tomorrow

Three of the most challenging aspects of the new standards are addressing embedded leases, calculating present value, and determining if your lease is an operating or capital lease. LeaseQuery has created free tools to make it easier to handle these difficult issues.

Free Lease Accounting Software