SiliconBeat

Internal mistakes made by their own accountants and the failure of their auditors to catch them are the biggest factor behind a company’s financial restatements, according to a new academic study. The research, conducted by Marlene Plumlee of the University of Utah and Teri Lombardi Yohn of Indiana University, questions the view that most mistakes are the result of the complexity of accounting standards enacted in the wake of financial scandals earlier this decade.

The study, brought to our attention by Lynn Turner, a former chief accountant with the SEC, was an attempt to examine the dramatic increase in financial restatements by public companies over the past few years.

Critics of the Sarbanes-Oxley regulations that were put into place as correctives for financial scandals such as the Enron debacle have blamed the the legislation and its new accounting complexity for the increase, accusing it of regulatory overkill and the increase in accounting costs, especially for smaller companies.

The study suggests, however, “that restatements are most often caused by basic internal company errors unrelated to the accounting standards themselves.” The study also found that “small companies and companies with small auditors are less likely to report material control weaknesses than other companies.”

As Turner noted, “the results are inconsistent with claims that accounting complexity is the primary driver of restatements and runs directly counter to the SEC’s proposal to defer for a fifth time the requirement that small companies and audit firms comply with SOX 404.”