ASC 606, Revenue from Contracts with Customers, is a complex standard that has led to numerous restatements. It requires the application of a principles-based framework to recognize revenue, which often involves the application of significant judgment and may result in changes to the timing or amount of revenue recognized compared to legacy GAAP. Not surprisingly, revenue recognition is a topic on which entities commonly seek SEC guidance in prefiling submissions, and these topics are frequently discussed in SEC staff speeches (e.g., at the annual AICPA & CIMA Conference on Current SEC and PCAOB Developments), underscoring, perhaps, the level of complexity.

ASC 740, Accounting for Income Taxes, further increases the risk of restatements for newly public companies. This standard governs recognition, measurement, presentation and disclosure of income tax assets and liabilities, and requires a thorough understanding of accounting and reporting matters. To comply with ASC 740, companies often need a set of tax basis books and records as well as a balance sheet. The risk of restatement can occur when a company underestimates or overestimates the amount of income tax expense, deferred liability or assets in its financial statements. For newly public companies, organizational/structural changes increase these risks. Private companies, for example, are often passthrough entities (partnerships, LLC, etc.). Upon going public, they become corporations with a new set of accounting rules.

ASC 842, Leases another relatively new accounting standard, has far-reaching impacts on leases. The lease standard brought many leases onto the company’s balance sheets, which can significantly impact its financial statements and could cause errors associated with lease accounting to be more material as compared to legacy GAAP. To accommodate this standard, entities not only have to change their accounting for and financial reporting of leases, but also their related systems and processes.

The complexities of applying the accounting guidance for the treatment of equity awards such as stock options and restricted stock units (RSUs) has also led to numerous accounting restatements. Warrant liabilities had an outsized effect on SPACs and companies that went public via SPAC merger, generating hundreds of restatements involving these entities. Most of these companies recorded warrants as equity at historical cost; however, the SEC issued a statement requesting companies to rethink whether the shares were indexed or included a tender offer provision. Warrants that are not indexed to a company’s own stock or that include a tender offer provision should generally be recorded as a liability with fair value adjustments recorded on a quarterly basis through the income statement.

EPS is a widely used calculation to assess a company’s financial performance. On the surface, EPS may seem like a straightforward calculation; however, the nuances of applying EPS guidance can be highly challenging. The process often involves information from disparate reports and schedules and may result in manual calculations, all of which increase the likelihood of miscalculations and restatements.

Set up a project management office (PMO) process, tools, and protocols for status tracking and reporting. Then assign resources, including a PMO manager, while making sure to allow enough time for each workstream. Strong and frequent communication should be part of the plan.

Involve resources with sufficient knowledge, whether from internal or external sources, or a combination of the two. Resources with deep technical knowledge are often the key to correcting a mistake.

Investigate the nature and cause while considering risks in adjacent areas. Determine the amount and extent of the restatement, including the impact on account balances and other areas within financial statements and, finally, make the adjustments.

Identify the control deficiencies, focusing on the root cause, and prepare a control deficiency assessment with an eye to developing a remediation plan. Keep in mind that the root cause may affect other controls and processes, including some that do not directly relate to the area being remediated. Restatements are often indicators of a material weakness in a company’s internal control framework.

Execute the communication plan. Bring the company’s auditors and board of directors along on the journey with frequent updates. Meanwhile, proactively manage communications to other stakeholders, such as investors, regulators (including the Securities and Exchange Commission), and banks.

A public company is required to make financial filings in a timely manner. These filings include financial restatements when errors are discovered. Once the errors have been identified, prepare the restated financials, including disclosures within the restated financial statements regarding the reason for the misstatement, the impact to the financial statements, and the changes to internal controls.

Determine the key learnings from the event, along with opportunities for improvement. This may mean obtaining additional resources with deep technical expertise whether internally or externally. Identify other areas of similar risk, then update internal controls and the company’s response framework. Beyond that, consider steps for continuous improvement for an enhanced and modernized internal control framework. Benefits of modernizing a company’s internal control framework include enhanced quality, increased efficiency, deeper insights, and reduced total cost of compliance.