(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

GAO Issues Report on Financial Restatements

In a follow-up report requested by Sen. Paul Sarbanes to the Government Accountability Office's 2002 report on financial restatements, the GAO found that restatements had increased in the period from 2002 through September 2005 and that 17 percent of the restating companies failed to properly disclose their intention to restate. The GAO recommended that the SEC investigate noncompliance with the current Form 8-K reporting requirements and to make consistent its guidance on the disclosure.

The SEC amended Form 8-K in 2004 to make the information about financial restatements more uniform and available to investors. However, the GAO pointed to conflicts between the amended forms and rules and staff guidance that was issued in November 2004. The instructions to Form 8-K state that a public company is not required to file a Form 8-K if the same information has previously been disclosed in a periodic report. The November 2004 guidance advised that a Form 8-K is required to report changes in accountants or when the independent auditors determine that previously issued financial statements should not be relied upon, even if the information was disclosed in a Form 10-K or 10-Q that was filed during the four business days following the event.

The GAO found that 17 percent of companies that restated their financial statements between the August 23, 2004, effective date of the Form 8-K amendments and September 30, 2005, did not file a Form 8-K as required by the SEC's guidance. Some of the companies disclosed the information in a Form 10-K, Form 10-Q or an amended form. Others failed to disclose the information altogether, while some filed under item numbers other than the required Item 4.02. Both large and small companies failed to file the required information, according to the GAO. Glass, Lewis & Co. LLC found that about one-third of companies that restated their financial reports in calendar year 2005 did not file under Form 8-K Item 4.02 to notify investors and the public about the restatements.

The GAO recommended that the director of the SEC's Division of Corporation Finance investigate possible noncompliance with the Form 8-K filing requirements and take corrective actions against any companies found to be deficient in their reporting obligations. The GAO also recommended that the SEC harmonize its existing instructions and guidance with respect to Item 4.02 by amending the instructions to Form 8-K and the other periodic filings to make clear that registrants must disclose on Form 8-K Item 4.02 all determinations of non-reliance on previously issued financial statements, regardless of whether they have been disclosed elsewhere.

John White, the director of the Division of Corporation Finance, responded that the Division has a long history of examining companies for potential noncompliance when it is brought to the staff's attention. He assured the GAO that the staff will continue this practice and take appropriate action. Director White added that the staff will carefully consider the GAO's recommendation to harmonize the existing instructions and guidance with respect to Item 4.02.

The GAO also reported that the number of large companies announcing restatements due to financial reporting fraud or accounting errors has increased. It found a significant drop in restatements based on revenue recognition issues, which were surpassed by cost or expense-related issues. The GAO explained that a large number of restatements in early 2005 corrected the accounting for leases by the retail and restaurant industries and for tax-related issues. The GAO attributed the spike in lease-related restatements to a letter from the SEC's chief accountant in February 2005 regarding the treatment of certain leases and leasehold improvements

The PCAOB also responded to the findings of the report. Chairman Mark Olson said the report will advance the PCAOB's understanding of financial restatements.