On June 30, 2002, President Bush signed the Sarbanes-Oxley Act into law (for a trip down memory lane, you can read Broc Romanek’s post reporting that momentous event here). Less than a month later, Governor Gray Davis signed AB 270 (Correa) into law. AB 270, one of several California laws enacted in the wake of the financial crises in 2001-2002, focused on improving oversight of the accounting industry by the California Board of Accountancy.
Among many other structural and regulatory changes, AB 270 imposed a requirement on licensees to report any restatement of earnings by an audit client. Cal. Bus. & Prof. Code § 5063(b)(1). The Board of Accountancy subsequently adopted an implementing regulation, 16 CCR § 59.
Since a number of years have gone by since AB 270 took effect, I asked the Board for the number of restatements reported to it. Based on the data provided to me, I created the graph below. Note that these data are presented on a state fiscal, not calendar, year basis (i.e., July 1 to June 30). Also, § 5063(b)(1) and Rule 59 require reports with respect to the following three categories of clients:
- Publicly traded companies that are required to file a tax return with the California Franchise Tax Board;
- Government agencies located in California; and
- Charitable organizations registered with the Office of the California Attorney General’s Registry of Charitable Trusts.
Note that the triggers for reporting vary based on type of client. For example, a restatement with respect to a charitable organization is required when the restatement is issued for purposes of correcting any error in a previously issued financial statement and that has resulted in the filing of an amended or superceding Internal Revenue Service Form 990 or 990PF.
Although the total number of restatements has declined for the last three fiscal years, we’ll have to see whether this trend will be maintained in the current fiscal year.
