Many compliance officers and in-house counsel are aware of the important steps they need to follow in order to assess a potential financial restatement and implement a comprehensive strategy for managing the restatement. It is perhaps equally instructive, however, to study the more egregious mistakes that others have made in the face of a restatement and thereby learn some important lessons about what not to do.

Here are five common mistakes to avoid when handling a financial restatement on behalf of your company:

Insufficient Resources

Unfortunately, some executives still have the misperception that a restatement isn’t such a big deal and can be handled internally. This perspective underestimates the amount of work that will need to be done, the time it will take and generally the size of the challenge when it comes to accomplishing a financial restatement.

There are several risks that a company takes on if they choose to tackle a restatement with their existing internal resources. First, there is the very real possibility that the restatement process will lag behind. Second, there is often a negative impact on the company’s accounting operations since employees have less time to focus on their regular day-to-day responsibilities. Third, employees who are stretched too thin for too long are prime candidates for early burnout.

If a financial restatement is required, it is useful to establish a taskforce of employees and advisors who are dedicated to the restatement. The company’s CFO could lead the taskforce’s efforts and the team would typically include both in-house and outside counsel. The taskforce should take responsibility for ensuring that the restatement effort has adequate resources and that it proceeds satisfactorily. Moreover, it may be prudent to bring in additional accounting resources to allow the company to complete the restatement without adversely affecting the continuing financial reporting obligations. It may be wise to bring in forensic accountants to assist in any issues related to accounting policies, internal controls, financial reporting process, and regulatory investigation issues.

Lack of Coordination with Independent Auditors

Some company executives take a “wait-and-see” approach and choose not to fully involve the independent auditors at the outset of a restatement. The problem with this decision is that the auditors may express concerns about an issue in the late stages of a restatement, which runs the serious risk of lengthening the period for completing the restatement. A delayed restatement translates into higher costs to the organization and can make for a poor reflection of the company in the eyes of investors and regulators.

Another common mistake is to insufficiently coordinate the auditor’s efforts. It is important that the company and the auditors communicate frequently and develop a good working relationship. The restatement issues should be well-defined and the auditor’s positions should be understood. Working closely with the independent auditors is essential if there is going to be a relatively smooth restatement process.

Destruction of Data

To complete a financial restatement, it frequently requires retrieving older financial data. If this data has not been properly preserved, the company’s restatement process can be extremely difficult and even more serious trouble can arise from possible actions by regulators or prosecutors. The preventive medicine for this potential crisis is to establish policies now that will minimize the risk of data destruction.

Beyond a company’s financial systems databases, other sources of relevant information may be obtained through electronic back-ups of server data, email and imaging of hard drives of certain PCs. Existing data retention policies should be evaluated and compared with actual practices. A detailed data preservation plan for securing all relevant sources of data should be established, documented and enforced. Destruction of data during the restatement process could lead to serious legal consequences as well as a less than reliable restatement.

Poor Communication

More problems arise when both internal and external communications are poorly executed. With respect to internal communications, some companies fail to properly instruct their employees about how to fully cooperate with the restatement process and to assist with the preservation of all electronic and hard copy data.

With respect to external communications, many companies are guilty of making premature prognostications about the likely outcome or completion date of a restatement. Although they may want to assure the outside world that all is well with the company, such comments can come back to haunt the company especially if the restatement subsequently turns up troubling information or complications arise that significantly extend the time required to complete the process.

An agreed-upon communication strategy should be established for informing such interested parties as vendors, customers, lenders, the investment community, rating agencies, stock exchanges, and federal and state regulators. When the restatement process is complete, it is important to adequately communicate the results of the restatement and begin the process of restoring confidence in the company’s financial reporting capabilities.

Inadequate Monitoring

The final common mistake when dealing with a financial restatement is to put a strategy in place and then leave it on autopilot while returning to the day-to-day operations of the company. Inadequate monitoring of the restatement can result in hurting the confidence of investors and other stakeholders, but it can also trigger serious business problems as well. For instance, some companies that have poorly monitored their restatements and subsequently experienced delays in issuing their financial statements have soon found themselves in breach of certain covenants contained in lender agreements.

By developing realistic milestones for completing the process and reviewing the timetable based on accomplishments, it may be possible to avoid multiple completion date announcements which can negatively impact the company’s credibility.

The fact is that many compliance officers and corporate executives have successfully dealt with a financial restatement, but it is also the case that others have inadvertently committed significant mistakes that have led to serious problems for their companies. For those who wish to create a clear roadmap that effectively guides their organization through a restatement and steers it into a favorable position from both a legal and financial market perspective, there is no substitute for learning from the mistakes of others.

This column solely reflects the views of its authors. It is for general information only and is not intended as legal advice with respect to any particular situation. Readers should not act upon information contained in this article without professional legal counseling. The views expressed in this article are those of the authors and do not necessarily reflect the views of their firm or any of the firm's clients.

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