Financial Restatements: Update of Public Company Trends, Market Impacts, and Regulatory Enforcement Activities
Released: 2006-08-01T00:00:00

Letter

Highlights

In 2002, GAO reported that the number of restatement announcements due to financial reporting fraud and/or accounting errors grew significantly between January 1997 and June 2002, negatively impacting the restating companies’ market capitalization by billions of dollars. GAO was asked to update key aspects of its 2002 report (GAO-03-138). This report discusses (1) the number of, reasons for, and other trends in restatements; (2) the impact of restatement announcements on the restating companies’ stock prices and what is known about investors’ confidence in U.S. capital markets; and (3) regulatory enforcement actions involving accounting- and audit-related issues. To address these issues, GAO collected restatement announcements meeting GAO’s criteria, calculated and analyzed the impact on company stock prices, obtained input from researchers, and analyzed selected regulatory enforcement actions.

While the number of public companies announcing financial restatements from 2002 through September 2005 rose from 3.7 percent to 6.8 percent, restatement announcements identified grew about 67 percent over this period. Industry observers noted that increased restatements were an expected byproduct of the greater focus on the quality of financial reporting by company management, audit committees, external auditors, and regulators. GAO also observed the following trends: (1) cost- or expense- related reasons accounted for 35 percent of the restatements, including lease accounting issues, followed in frequency by revenue recognition issues; and (2) most restatements (58 percent) were prompted by an internal party such as management or internal auditors. In the wake of increased restatements, SEC standardized disclosure requirements by requiring companies to file a specific item on the Form 8-K when a company’s previously reported financials should no longer be relied upon. However, between August 2004- September 2005, about 17 percent of the companies GAO identified as restating did not appear to file the proper disclosure when they announced their intention to restate. These companies continued to announce intentions to restate previous financial statements results in a variety of other formats.

Background

Public confidence in the reliability of financial reporting is critical to the effective functioning of the securities markets, and various federal laws and entities help ensure that the information provided meets such standards. Federal securities laws help to protect the investing public by requiring public companies to disclose financial and other information. SEC was established by the Securities Exchange Act of 1934 (the Exchange Act) to operationalize and enforce securities laws and oversee the integrity and stability of the market for publicly traded securities. SEC is the primary federal agency involved in accounting requirements for publicly traded companies. Under Section 108 of the Sarbanes-Oxley Act, SEC has recognized the accounting standards set by the Financial Accounting Standards Board (FASB)—generally accepted accounting principles (GAAP)—as ”generally accepted” for the purposes of the federal securities laws. SEC reviews and comments on registrant filings and issues interpretive guidance and staff accounting bulletins on accounting matters.

To issue securities for trading on an exchange, a public company must register the securities offering with SEC, and to register, the company must meet requirements set by the Exchange Act, as amended, including the periodic disclosure of financial and other information important to investors. The regulatory structure of U.S. markets is premised on a concept of corporate governance that makes officers and directors of a public company responsible for ensuring that the company’s financial statements fully and accurately describe its financial condition and the results of its activities. Company financial information is publicly disclosed in financial statements that are to be prepared in accordance with standards set by FASB and guidance issued by SEC. The integrity of these financial statements is essential if they are to be useful to investors and other stakeholders.

In addition to the requirements and standards previously discussed, the securities acts and subsequent law set requirements for annual audits of the financial statements by registered public accounting firms to help ensure the integrity of financial statements. The applicable standards under these laws require that auditors plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes an examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements; an assessment of the accounting principles used and significant estimates made by management; and an evaluation of the overall financial statement presentation. The purpose of the auditor’s report is to provide reasonable assurance about whether the financial statements present fairly, in all material respects, the financial position of the company, the results of its operations, and its cash flows, in conformity with U.S. GAAP.

The Sarbanes-Oxley Act reinforces principles and strengthens requirements (established in previous law), including measures for improving the accuracy, reliability, and transparency of corporate financial reporting. Specifically, Section 302 requires that the chief executive officer (CEO) and chief financial officer (CFO) must certify for each annual and quarterly report filed with SEC that they have reviewed the report; the report does not contain untrue statements or omissions of a material fact; and the financial information in the report is fairly presented. In addition, Section 404 requires company management to annually (1) assess its internal control over financial reporting and report the results to SEC and (2) have a registered public accounting firm attest to and report on management’s assessment of effectiveness of internal control over financial reporting. While larger public companies have implemented Section 404, most companies with less than $75 million in public float— about 60 percent of all public companies—have yet to complete this process. (See app. IV for further discussion of the act.)

To oversee the auditing of publicly traded companies, the Sarbanes-Oxley Act established PCAOB, a private-sector nonprofit organization. Subject to SEC oversight, PCAOB sets standards for, registers, and inspects the independent public accounting firms that audit public companies and has the authority to conduct investigations and disciplinary proceedings and impose sanctions for violations of law or PCAOB rules and standards. Specifically, Section 105 of the Sarbanes-Oxley Act granted PCAOB broad investigative and disciplinary authority over registered public accounting firms and persons associated with such firms. In May 2004, SEC approved PCAOB’s rules implementing this authority. According to the rules, PCAOB staff may conduct investigations concerning any acts or practices, or omissions to act, by registered public accounting firms and persons associated with such firms, or both, that may violate any provision of the act, PCAOB rules, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including SEC rules issued under the act, or professional standards. Furthermore, PCAOB’s rules require registered public accounting firms and their associated persons to cooperate with PCAOB investigations, including producing documents and providing testimony. The rules also permit PCAOB to seek information from other persons, including clients of registered firms. See figure 1 for the existing system of corporate governance and accounting oversight structures.

The Number of Restatements Has Continued to Grow and New Trends Have Emerged

Although the number of public companies restating their publicly reported financial information due to financial reporting fraud and/or accounting errors remained a relatively small percentage of all publicly listed companies, the number of restatements has grown since 2002. For example, 314 companies announced restatements in 2002 and 523 announced restatements in 2005 (through September). In addition, of the 1,390 announced restatements we identified, the percentage of large companies announcing restatements has continued to grow since 2002.While large and small companies restate their financial results for varying reasons, change in cost- or expense-related items, which includes lease accounting issues, was the most frequently cited reason for restating. While both internal and external parties could prompt restatements, internal parties such as company management or internal auditors prompted the majority of restatement announcements. Finally, we found that, despite SEC’s efforts to create a more transparent mechanism for disclosing restatements through revisions to Form 8-K, some companies had not properly filed such disclosures and continued to announce intentions to restate previous financial statements results in a variety of other formats.

The Number of Restatement Announcements Grew since 2002, as Did the Number of Listed Companies Restating

The number of annual announcements of financial restatements generally increased, from 314 in 2002 to 523 in 2005 (through September)—an increase of approximately 67 percent (see fig. 2). This constituted a nearly five-fold increase from 92 in 1997 to 523 in 2005. Furthermore, from July 2002 through September 2005, a total of 1,121 public companies made 1,390 restatement announcements. Some industry observers noted that several factors may have prompted more U.S. publicly traded companies to restate previously reported financial results, including (1) the financial reporting requirements of the Sarbanes-Oxley Act, especially the certification of financial reports required by Section 302 and the internal controls provisions of Section 404; (2) increased scrutiny from the newly formed PCAOB through its inspections of registered public accounting firms; and (3) increased staffing and review by SEC.

As the number of restatement announcements rose, the numbers of listed companies making the announcements increased as well. While the average number of companies listed on NYSE, Nasdaq, and Amex decreased about 10 percent from 7,144 in 2002 to 6,473 in 2005, the number of listed companies restating their financial results increased from 265 in 2002 to 439 in 2005 (through September), representing about a 67 percent increase (see table 1). On a yearly basis, the proportion of listed companies restating grew from 3.7 percent in 2002 to 6.8 percent in 2005. Over the period of January 1, 2002, through September 30, 2005, the total number of restating companies (1,084) represents 16 percent of the average number of listed companies from 2002 to 2005, as compared to almost 8 percent during the 1997-2001 period.

A number of other researchers also found that restatements had increased since calendar year 2002. The researchers used somewhat different search methodologies to identify companies that restate previously reported financial information and included slightly different criteria for inclusion but arrived at similar conclusions. The Huron Consulting Group (HCG) identified 1,067 financial statement restatements from 2002 to 2004 and noted that the increase was significant from 2003 to 2004. Also, Glass, Lewis & Co. LLC (Glass Lewis) identified 2,319 restatements of previously issued financial information by U.S. public companies from 2003 to 2005 and also found an increase in the number of restatements over that period. Unlike our work, which included a limited number of companies traded OTC Bulletin Board or on Pink Sheets, the Glass Lewis study also included hundreds of smaller companies quoted on the OTC Bulletin Board or on Pink Sheets that generally lacked analyst coverage. See appendix VI for a comparison of various restatements studies.

The Percentage of Large Companies Restating Has Continued to Grow

For the restatements we identified, the number of large companies announcing restatements of their previously reported financial information due to financial reporting fraud and/or accounting errors has increased. More specifically, large companies (i.e., companies having over $1 billion in total assets), as a percentage of the total restating companies have increased from about 30 percent in 2001 to over 37 percent in 2005. Likewise, the average market capitalization of a company announcing a restatement (for which we had data) has grown from under $3 billion (with a median of $277 million) in the latter half of 2002 to over $10 billion (with a median of $682 million) through September 2005. While the average size of listed companies increased about 68 percent from 2002 to 2005, the average size of companies restating their financials grew almost 300 percent.

Another indication that large public companies announcing restatements has continued to increase, is the number of companies identified as announcing restatements that are listed on the NYSE, which has more large companies than the other U.S. stock exchanges. For example, between 2002 and September 2005, the number of NYSE-listed companies announcing restatements had increased 64 percent from 114 to 187. During the same time, the number of Nasdaq-listed companies announcing restatements increased 55 percent from 137 to 212, and the number of Amex-listed restating companies increased more than 175 percent from 14 to 40.

While more Nasdaq-listed companies announced restatements than NYSE- listed companies, the proportion of NYSE-listed companies restating (relative to the total number of companies listed on the NYSE) surpassed Nasdaq-listed companies over the period 2002–2005. As figure 3 illustrates, for the announced restatements we identified, in 2002, about 4 percent of NYSE-listed companies announced restatements for financial reporting fraud and/or accounting errors, whereas this percentage rose to more than 7 percent by September 2005. During the same period, the percentage of Nasdaq-listed restating companies rose from less than 4 percent to almost 7 percent. From 2002 to 2005, the percentage of NYSE- and Nasdaq-listed companies restating essentially mirrored each other in movement throughout the period by declining and then increasing. However, the percentage of Amex-listed restating companies rose each year during the 2002 to September 2005 period from about 2.0 percent to almost 5.5 percent.

Restatement Announcements Most Frequently Were Made for Cost- or Expense-Related Reasons

Although public companies restate their financial results for a variety of reasons, cost- or expense-related issues accounted for more than one-third of the 1,390 restatement announcements identified from July 2002 through September 2005 (see fig. 4). We classified cost- or expense-related restatements generally to include a company understating or overstating costs or expenses, improperly classifying expenses, or any other mistakes or improprieties that led to misreported costs. Lease accounting issues that surfaced in early 2005 were also included in this category.

Our analysis also shows a significant drop in restatements announced for revenue recognition reasons, which had accounted for almost 38 percent of the restatements in our 2002 report. Cost- or expense-related issues surpassed revenue recognition issues as the most frequently identified cause of restatements primarily because of a large number of announcements made in early 2005 to correct accounting for leases by the retail/restaurant industry and tax-related issues. For example, 135 public companies announced restatements involving issues solely related to accounting for leases in 2005 after SEC chief accountant’s February 7, 2005, letter regarding the treatment of certain leases and leasehold improvements. However, revenue recognition remained the second most frequently identified reason for restatements from July 2002 through September 2005, accounting for 20 percent of all the restatements. Actions that we classified under “revenue recognition” included a company recognizing revenue sooner or later than would have been allowed under GAAP, or recognizing questionable or invalid revenue. (See table 2 for a description of each reason.)

Internal Parties Prompted the Majority of Restatements Announced from 2002 through 2005

While both internal and external parties—such as the restating company’s management or internal auditor, an external auditor, SEC, or others—can prompt restatements, about 58 percent of the 1,390 announced restatements were prompted by internal parties. This was an increase from about 49 percent in our 2002 report. However, in both our prior report and this report, external parties may have been involved in discovering some of these misstatements, even if the companies may not have made that information clear in their restatement announcements or SEC filings. The external auditor, SEC, or some other external party such as the media (as in the case of an August 2002 restatement announcement by AOL Time Warner Inc. (AOL)), was identified as prompting the restatement in 24 percent of the announcements (compared to 16 percent in our 2002 report). In the remaining 18 percent of the announcements (compared with 35 percent in our 2002 report), we were not able to determine who prompted the restatement because the announcement or SEC filing did not clearly state who discovered the misstatement of the company’s prior financial results.

While SEC Revised Its Forms to Make Disclosures of Certain Restatements More Uniform, Many Companies Continue to File in Other Formats

SEC has revised Form 8-K, in part, to make information on financial restatements more uniform and apparent to investors, but many companies appeared to have filed potentially deficient filings. In addition, conflicting instructions and guidance resulted in some companies disclosing similar financial information in varying degrees and formats. In a 2003 report required by the Sarbanes-Oxley Act, SEC proposed to address the lack of uniformity by amending several of its periodic disclosure forms— essentially to make issuers’ public notification of financial information uniform. Specifically, in its report, SEC proposed to amend Form 8-K to add a specific line item for public companies to disclose what was restated and why.

In March 2004, consistent with its proposal in the 2003 report, SEC amended Form 8-K to, among other things, add a new line item (Item 4.02), which requires public companies to file the Form 8-K (Item 4.02) within 4 business days if management or the company’s independent auditors determine that previously issued financial statements should not be relied upon. This alerts investors to potentially important company events that may impact their investment decision. This change became effective August 23, 2004. This change to Form 8-K included a limited safe harbor for failure to timely file an 8-K in certain situations, including in a situation in which the company makes the determination the financial statements may not be relied upon, but not in a situation when the independent auditor makes such a determination.

In November 2004, SEC issued additional guidance to address questions concerning the revised disclosures. This “Frequently Asked Questions” guidance states that a Form 8-K is required for Item 4.01 (Change in Accountant) and Item 4.02 events, even if a periodic report such as a Form 10-K or 10-Q disclosing such information is filed during the 4 business days following the event. The amended forms and the amended rules do not make this Form 8-K filing requirement clear, and instead indicate that the filing of a Form 8-K may not be required if previously reported. Specifically, the instructions for Form 8-K state that a public company is not required to file a Form 8-K when, substantially the same information has been previously disclosed on a periodic report.

Between August 23, 2004, and September 30, 2005, about 17 percent of restating companies (111 companies) did not appear to file a Form 8-K for restatements as required by SEC guidance. According to our analysis, about 30 percent of restating companies (34 companies), during this same time period, failed to file a Form 8-K disclosing their restatements. It appears that these companies either failed to disclose the announced restatement at all or disclosed it in a Form 10-K or 10-Q or an amended form. The remaining 77 companies filed a Form 8-K disclosing their restatement, but under items other than the required 4.02—such as 2.02 (Results of Operations and Financial Condition) or 8.01 (Other Events). Furthermore, we found that the companies filing these potentially deficient filings included a mix of large and small companies. For example, over one- third of the 111 companies we identified were large companies (as measured by market capitalization, asset size, or revenue). Moreover, a study by Glass Lewis found that about one-third of companies restating in calendar year 2005 did not file a Form 8-K (Item 4.02) to notify investors, or the public in general, about such a corporate event.

Market Capitalization of Restating Companies Decreased by Billions in the Days Surrounding Restatement Announcements, but Was Less Severe Than in Our Prior Report

We estimated that—from the trading day before through the trading day after an initial restatement announcement—stock prices of the restating companies decreased by an average of almost 2 percent, compared with an average decline of nearly 10 percent in our 2002 report. In addition, we estimated that the market capitalization of restating companies decreased by over $36 billion when adjusted for overall market movements (nearly $18 billion unadjusted) compared to adjusted and unadjusted declines of around $100 billion reported in 2002. These declines, while potentially significant for the investors involved, if realized, represented about 0.2 percent of the total market capitalization of the three securities exchanges, which was about $17 trillion in 2005. The reasons for restatements also appear to have affected the severity of the impact on market capitalization, with restatements for reasons that could involve financial reporting fraud or other unspecified causes resulting in the most severe size-adjusted market reaction on average. However, revenue issues continued to have a sizeable impact and, in a change from our previous report, cost- or expense-related restatements had the greatest impact in dollar terms because there are more of them. We also found that the market impact of restatement announcements on restating companies over longer periods was mixed, in contrast to our prior report, in which we found larger, more persistent stock price and market capitalization declines for restating companies.

On Average, Stock Prices Fell over the Days Surrounding the Initial Restatement Announcement

We estimated that, for the 1,061 cases we were able to analyze from July 1, 2002, to September 30, 2005, the stock prices of companies making an initial restatement announcement fell by almost 2 percent (market- adjusted), on average, from the trading day before through the day after the announcement (the immediate impact). Unadjusted losses in the market capitalization of restating companies totaled nearly $18 billion, ranging from a net gain of almost $9 billion from July through December 2002 to a loss of about $16 billion for 2004 (see table 3). But, when the losses were adjusted for general movements in the overall market, the market capitalization of the restating companies decreased an estimated $36 billion.

In our prior report, we found that the immediate impact was an average decline in stock price of nearly 10 percent and a decline, both adjusted and unadjusted, in market capitalization of around $100 billion. Thus, in total, the immediate impact for July 2002–2005 appeared to be less severe. The smaller average decline in stock price (a 2 percent decline compared with a nearly 10 percent decline) suggested that the market’s reaction for each company, on average, was not as severe. On an annual basis, and when not adjusted for market movements, in the current report the average annual decline was $5.4 billion, compared with $18.2 billion, in our 2002 report. However, when market-adjusted, the average decline was $11.2 billion over the analysis period for this report, compared with an average $17.4 billion decline for the period covered in our prior report. The increased severity of the market-adjusted immediate impact on market capitalization likely reflected the more negative reaction to a restatement announcement given the generally positive overall market movement during the 2003–2005 period, and could also reflect the fact that more, larger companies announced restatements in the July 2002–2005 period.

The immediate impact on the market capitalization of restating companies, while potentially large for the investors involved, if realized, generally was less than 0.2 percent of the total market capitalization of companies listed on NYSE, Nasdaq, and Amex for a given year during 2002–2005, ranging in magnitude from 0.01 percent to 0.14 percent (see table 4). That the immediate impact—as a percentage of total market capitalization—would appear relatively small is not surprising, considering the short trading day interval that we analyzed. We chose the 3-trading-day window to focus as much as possible on the restatement announcement, to the exclusion of other factors. Later in this report, we examine losses over longer periods, as well as the effects of restatements on overall market confidence.

While our analysis generally showed declines in market capitalization, the results for the second half of 2002 were positive and can be explained in large part by the influence of two large companies—Tyco International Ltd. (Tyco) and AOL. The market reactions to the restatement announcements of the two companies resulted in adjusted market capitalization gains of $4.5 billion. In the cases of Tyco and AOL, both of which involved revenue recognition issues, the restatement announcements came weeks or months after initial news of potential accounting fraud and errors surfaced, and so the market had likely already anticipated these announcements and factored the information into the companies’ stock prices well before the restatement announcement. Over the 3 trading days surrounding the announcement dates that we identified, Tyco’s market capitalization increased by around $2.8 billion and AOL’s market capitalization increased by around $1.6 billion.

We also conducted a separate analysis of the immediate impact of restatement announcements for the 329 announcements that we were unable to analyze in the primary event study. This group included 159 announcements that were attributed to companies with stock not listed on the exchanges. We limited this additional analysis to a simple assessment of the unadjusted change in market capitalization over the three trading days surrounding the restatement announcement, generally relying on data we obtained from SEC’s and Nasdaq’s Web sites. We were able to gather sufficient data to analyze 242 of the 329 announcements (114 announcements made by listed companies and 128 announcements made by unlisted companies). We estimated that, on average, these restatement announcements resulted in an average decline in market capitalization of 1.5 percent from the trading day before the announcement through the trading day after the announcement, reflecting an unadjusted decline of about $3.7 billion in addition to the nearly $18 billion decline estimated in the primary event study.

Reasons That Could Involve Reporting Fraud or Other Unspecified Issues, and Revenue Recognition Issues Continued to Significantly Impact Market Capitalization; but Cost or Expense Issues Produced Greater Dollar Losses

Announcements made for reasons that could involve financial reporting fraud or other unspecified causes, which we classified in the Other category, as well as restructuring and revenue recognition-related issues, had the largest negative impact on market capitalization when adjusted for the size of a restating company (see fig. 6); however, when measured in dollars, cost- or expense-related restatement announcements accounted for more of the immediate decline in market capitalization than each of the other reasons, over our analysis period. These results are different from the findings in our earlier report, suggesting that the nature of the market response to restatements may have changed in some respects. (We discuss how different types of restatements may have affected investor confidence in another section of this report.) To assess the immediate market impact of a given type of restatement on a restating company’s market capitalization, we computed the ratio of the estimated change in the company’s market capitalization to the company’s total market capitalization over the 3 trading days surrounding the announcement of a restatement. We then averaged these impacts for each reason.

While restatement announcements involving related-party transactions, which can revolve around revenue issues, appeared to have the largest negative impact, this result was not statistically different from zero. This category accounted for a relatively small number of restatements, and the results were heavily influenced by three announcements that had sizeable market reactions.

In contrast to our previous report, in which positive responses to two large restatements attributed to restructuring, asset impairment, and inventory issues led to market gains in that category, restatements made for these reasons in 2002–2005 represented about 29 percent of the market-adjusted market capitalization losses. These reasons accounted for about 11 percent of the cases we analyzed, and the median size of a company restating for these reasons was $504 million.

The effect of restatements announced for revenue recognition issues on market capitalization initially appeared weaker than in our previous report. Restatements involving revenue recognition accounted for almost 20 percent of the cases, but only around 10 percent of the market-adjusted market capitalization losses. The median size of a company restating for this reason was $321 million; thus it appears that companies announcing restatements for revenue recognition reasons tended to be smaller. However, when adjusted by the size of the restating company, restatement announcements involving revenue recognition issues (more than many other reasons) resulted in an average loss that represented a larger percentage of a restating company’s market capitalization.

Cost- or expense-related restatements had a greater effect on market capitalization than in our previous report, and were distinguished from restatements for other reasons in three ways. First by dollars, cost- or expense-related restatement announcements accounted for more of the immediate declines in market capitalization than other reasons over our analysis period. More specifically, cost- or expense-related restatement announcements accounted for $15.2 billion, or about 42 percent, of the $36.5 billion in total losses (market-adjusted) over our analysis period. This decline was driven in large part by the January 9, 2004, restatement announcements by Shell Transport and Trading Company, plc, and Royal Dutch Petroleum Company, which represented a decline in estimated market capitalization attributed to the cost- or expense category of over $4 billion. Second, when measured by median market capitalization, companies announcing restatements involving cost or expense issues were the largest. The median size of a company restating for cost or expense reasons was $632 million. Furthermore, of the 1,061 cases analyzed, cost or expense was the most frequently cited reason for restating (38 percent).

Finally, the market did not perceive all restatements negatively. We found that announcements involving the acquisition and merger category—with a median company size of $318 million—resulted in an overall increase of over $1.5 billion in market capitalization. The positive results are in significant contrast to our previous report, in which we attributed more than $19 billion in market capitalization decline to this category.

Restatement Announcements Continued to Have Some Longer-Term Impact on the Market Capitalization of Restating Companies

Our analysis of restatement announcements showed mixed results over intermediate and longer periods, but these announcements overall tended to have some longer-term impacts. On a market-adjusted basis, from 20 trading days before through 20 trading days after a restatement announcement (the intermediate impact), we estimated that the stock prices of restating companies declined by nearly 2 percent on average, and their market capitalization declined by over $78 billion in aggregate; whereas, on an unadjusted basis, the market capitalization of restating companies decreased around $5 billion (see table 5). This suggests that the reaction was more negative than expected given the movement in the overall market.

On a market-adjusted basis, from 60 trading days before through 60 trading days after the announcement (the longer-term impact), we estimated that the stock prices of restating companies decreased by less than 2 percent on average and their market capitalization decreased by over $126 billion in aggregate (see table 6). Unadjusted, the longer-term impact was an increase of about $34 billion in the market capitalization of restating companies. In our 2002 report, we estimated that the unadjusted market capitalization of restating companies that we analyzed decreased by close to $240 billion from 60 trading days before through 60 trading days after the announcement. This large difference may be the result of the generally positive overall market movement during 2003–2005, an increased number of restatements that the market did not view negatively, or the possibility that the financial markets have grown increasingly less sensitive to restatement announcements since 2002.

As we considered longer event time frames, this increased the possibility that other factors and events may have affected a restating company’s stock price. Nevertheless, expanding the event window beyond the immediate trading days around the restatement announcement date allowed us to assess the longer-term impact of restatement announcements. The longer time frame also allowed us to capture any impact from earlier company announcements, which may have signaled restatements (for example, a company’s CFO departing a company suddenly, its outside audit firm resigning, or the notice of an internal or SEC investigation at the company). With such events, investors may sense that more negative news is forthcoming and drive the company’s stock price lower. For example, speculation about potential accounting problems at AOL first appeared publicly in mid-July 2002 in The Washington Post; however, it was not until mid-August that the company announced that it would restate. Our immediate impact analysis around the August 14, 2002, announcement date revealed a sizeable positive impact. However, our intermediate impact analysis showed that the market reacted negatively to the release of the news over this event window.

Finally, our analysis only attempts to control for overall market movements, and so for these longer periods we cannot adjust for other factors such as company-specific news unrelated to the restatement. For example, several weeks after announcing a restatement a company could win a lucrative contract or be the target of an acquisition, both of which would likely have a positive impact on its stock price. We subsumed the impacts of any additional, unrelated events that occurred during this time period, which would attribute them to the restatement announcement. Appendix I provides additional details about these measures, along with information about their limitations.

Certain Restatements Appear to Affect Investor Confidence but Trends in Restatements Complicate Analysis

Although researchers generally agree that restatements can have a negative effect on investor confidence, the surveys and indexes of investor confidence that we reviewed did not indicate definitively whether investor confidence increased or decreased since 2002. Researchers noted several reasons for the inconclusive results about the effects of restatements on investor confidence. For example, some researchers have noted that, since 2002, investors may have had more difficulty discerning whether a restatement represented a response to aggressive or abusive accounting practices, constituted remediation of past accounting deficiencies, or merely represented technical adjustments. Furthermore, investor confidence remains difficult to quantify because it cannot be measured directly and because investors consider a variety of factors when making investment decisions. However, we identified several survey-based indexes that use a variety of methods to measure investor confidence; we also identified empirical work by academics and financial industry experts. A periodic UBS/Gallup survey-based index aimed at gauging investor confidence found that, although investor confidence remains low, accounting issues appear to be of less concern. In contrast, according to the Yale index, which asks a different set of questions, institutional investors have had slightly more confidence in the stock market since 2002; the index produced uncertain results for individual investors.

Researchers Have Suggested Numerous Reasons for Why Investors May Have Reacted Both Positively and Negatively to Restatements since 2002

Although researchers generally have agreed that restatement announcements could send unfavorable messages about restating companies to the capital markets, an analyst with whom we spoke expressed less agreement about the causes and effects of restatement announcements on investors (and investor confidence) since 2002. While we found some evidence in our 2002 report that suggested that restatement announcements prior to July 2002 may have led to widespread concerns about the perceived unreliability of financial reports, the impact of restatements since July 2002 on investor confidence has been more uncertain because the driving forces behind the increase in restatements have been less clear. For example, some analysts have suggested that investors may not have been able to discern whether restatements since 2002 represented a response to: aggressive or abusive accounting practices, the complexity of accounting standards, the remediation of past accounting deficiencies, or just technical adjustments.

Some analysts indicated that the increase in the restatements is a serious problem with negative consequences on investor confidence. Other analysts have said that restatements might have minimal (or positive) effects on confidence if investors saw them as a remediation of accounting problems existing prior to the passage of the Sarbanes-Oxley Act, recognizing some restatements as the expected byproduct of a greater focus on the quality of financial reporting by management, audit committees, external auditors, and regulators since 2002. Although accounting issues discovered at one company could cause capital market participants to reassess the credibility of financial statements issued by other companies, researchers also noted the absence, so far, of large numbers of restatements that represent deliberate violations of GAAP—the same kind of restatements many believed produced widespread effects on investor confidence in 2001 and 2002 (e.g., Enron, WorldCom, and Adelphia). In that vein, others noted that the Sarbanes-Oxley Act, the collapse of Arthur Andersen, and perceived litigation risks have encouraged more conservative approaches that resulted in restatements to correct small errors or technical adjustments that likely were irrelevant to investors. Some believed that at least a portion of the restatements since 2002 have resulted from excessive complexity in accounting principles or the second-guessing of legitimate judgment calls that did not appear relevant to the valuations of the companies involved. One expert expressed concern that restatements may have lost their salience to market participants because they now occur so frequently, while others noted that investor confidence would be negatively affected if the number of restatements did not decline in the near future.

UBS/Gallup Index of Investor Confidence Reveals Investor Confidence Remains Low but Accounting Issues Appear to Be of Less Concern

Directly measuring the effect of restatements on investor confidence remains difficult because so many factors go into any investment decision and the reasons for restatements, which can affect investor response, often are unclear. However, we have highlighted results from two respected survey-based indexes of investor confidence, obtained from UBS Americas, Inc. and the International Center for Finance at the Yale School of Management. The UBS Index has been acknowledged for its accuracy and timeliness, and the Yale School of Management Indexes are considered to be the longest-running effort to measure investor confidence.

The UBS/Gallup Index of Investor Optimism suggests that investor confidence remains well below the March 2002 level, when investor optimism had started to rebound following the Enron scandal. As shown in figure 7, according to the survey, concerns about accounting practices and corporate governance started to affect investor optimism, which were heightened following the WorldCom restatement announcement in June 2002. The index continued to decline until March 2003 when it reached an all-time low of 5—mirroring a similar decline in stock markets. However, in April, the survey indicates that investors where becoming more confident in the U.S. economic recovery throughout most of 2003. By January 2004, the index was back up to 108 before experiencing another steep decline by September 2005 as markets reacted, in part, to a sharp increase in energy prices. While the Index increased over the reminder of 2005, it remained below the March 2002 level through the second quarter of 2006.

These trends are consistent with various proxies for investor confidence. For example, since April 2003, net new cash flows to equity mutual funds have been positive. And, according to “Barron’s Confidence Index,” investor confidence returned to its historical average by mid-2004 and— despite a decline in investor confidence in 2005—has remained above its lows in 2002 and 2003.

While the 2002 and 2003 surveys reported that the leading concern expressed by investors was the negative impact of questionable accounting practices on the market, in 2005 and 2006, investors identified a number of other reasons as more significant for the decline in investor optimism. The major reasons cited for the decline were (1) the price of energy, including gas and oil; (2) the outsourcing of jobs to foreign countries; (3) the federal budget deficit; (4) the situation in Iraq; and (5) the economic impact of Hurricane Katrina and other storms. While some of these reasons reflect current events, others consistently were viewed as less important than accounting issues in the 2002, 2003, and 2004 surveys. However, it should be noted that accounting issues continue to be viewed as more important than a variety of other forces affecting the investment climate such as expectations regarding inflation, the value of dollar, and the threat of more terrorist attacks.

While a significant portion of all investors surveyed continue to believe that accounting issues were negatively affecting the market, according to the UBS/Gallup survey the percent of investors feeling this way has decreased (see fig. 8). While 91 percent of all investors surveyed in 2002 felt that accounting issues were negatively impacting the market, about 71 percent felt that way in May 2006. Moreover, the percentage of investors indicating that accounting issues were hurting the investment climate in the United States “a lot” fell from 80 percent in July 2002 to 39 percent in May 2006.

The results of UBS surveys were consistent with the findings of the Securities Industry Association’s (SIA) annual investor surveys. SIA found that, although accounting at U.S. corporations was still a major concern among investors in 2004, concern had declined significantly from 2002. Moreover, in 2004, investors seemed more concerned with the political environment and the state of the U.S. economy than accounting fraud and corporate governance issues. What has happened since 2004 is unclear because no survey was conducted for 2005. However, a newer index, the State Street Investor Confidence Index, which attempts to measure investors’ risk appetite by measuring the percent of risky assets investors hold in their portfolio, found that investor confidence remained relatively unchanged throughout 2005 and into 2006.

Yale Indexes Shows Mixed Results for Changes in Stock Market Confidence since 2002

In our 2002 report, we noted the Yale Indexes suggested significantly different impacts of restatements on investor confidence than the UBS/Gallup Index of Investor Optimism; however, since the 2003, the differences in the indexes have become less significant. The International Center for Finance at the Yale School of Management calculates four indexes that are based on survey questions directed to both wealthy individual and institutional investors. Although the indexes do not all move in the same direction over time, or even approximately so, the indexes generally show a small improvement in institutional investor confidence over the value for June 2002, but a slight decline in individual investor confidence with one exception. Some of the Yale indexes show pronounced volatility in short-term confidence. In fact, there were periods during 2003, 2004, and 2005, where some measures of confidence declined significantly before rebounding in 2006. Although these confidence indexes did not directly measure the impact of restatements on investor confidence, they illustrate the difficulty in attempting to gauge general confidence in the market and how different classes of investors can interpret and respond to events in different ways.

As in 2002, we focused on the three indexes that most directly measured investor confidence. The first Yale index is the One-Year Confidence Index, which indicated that institutional investor confidence fluctuated between June 2002 and May 2006, but ended higher than 2002 levels. During the same periods, individual investor confidence also fluctuated, but continued to trend downward. This implies a divergence in opinion between individual and institutional investors, but it is unclear what this difference means for overall confidence in the stock market and how restatements affect confidence. These findings do appear to suggest that developments during 2004 and 2005 had some longer-term negative effect on individual investors’ confidence, but that any negative effect on institutional investors’ confidence was temporary.

The second Yale index is the Buy on Dip Confidence Index, which suggests confidence has been virtually unaffected despite fluctuations in both directions from 2004 to 2005. Since the period immediately after September 11, 2001, and the beginning of the Enron scandal, a few months later individual and institutional confidence that the stock market would rise the day after a sharp fall has diverged, with institutional dropping and individual confidence rising somewhat. However, between December 2003 and May 2006, institutional investor confidence increased from 57 to 68 percent, somewhat above its June 2002 value (62 percent), while individual investor confidence fluctuated up and down but eventually settled just 1 percentage point below its June 2002 value. The price-to-earnings ratio functioned as an indicator supporting the finding of unchanged confidence; in January 2006, the ratio was equivalent to its June 2002 value, and has remained valued at more than the historical average.

The third Yale index is the Crash Confidence Index, which suggested that confidence generally has been low—less than 50 percent—for both individual and institutional investors, providing the only evidence of a similar movement. Despite remaining low since October 2002, when the market reached its lowest point in 6 years, confidence has shown a distinct increase for both individual and institutional investors. Specifically, by May 2006 this index showed an improvement from June 2002 values, with a 43 percent and a 17 percent increase for institutional and individual investors, respectively. However, confidence in the probability that a catastrophic stock market crash would not occur in the United States may provide very little insight into whether market participants are confident in the reliability of financial information transmitted to investors, because not even the accounting scandals of 2001 and 2002 triggered a major collapse in market valuations. Instead, the increase in confidence observed may merely be a vote of general confidence in the resiliency of U.S. capital markets.

Accounting- and Auditing-Related Enforcement Actions Have Continued to Grow

The number of SEC enforcement cases involving financial fraud and issuer reporting issues increased more than 130 percent from fiscal year 1998 to 2005. Moreover, in fiscal year 2005, cases involving financial fraud and issuer reporting issues constituted the largest category of enforcement actions. The resources SEC devoted to enforcement grew as well. Of the enforcement actions SEC resolved between March 1, 2002, and September 30, 2005, most of the actions were taken against companies or their directors, officers, employees, and other related parties. Finally, the newly created PCAOB also has broad investigative and disciplinary authority over public accounting firms that have registered with it and persons associated with such firms; PCAOB has brought several enforcement actions since its inception.

Financial Fraud and Issuer Reporting Issues Accounted for a Significant Number of SEC’s Actions

SEC’s Division of Enforcement investigates possible violations of securities laws, including those related to financial fraud and issuer reporting issues. Between fiscal years 2001 and 2005, these types of cases have increased as a percent of SEC’s total enforcement cases from 23 to almost 30 percent (see fig. 9). From fiscal years 2002 to 2005, SEC has initiated an average of about 588 enforcement actions per year, compared to an average of 497 for fiscal years 1998 to 2001. Of these actions, an average of about 135 per year involved financial fraud or issuer reporting issues compared to an average of 97 per year for the prior period.

In fiscal year 2005, cases involving financial fraud and issuer reporting issues were the largest category of enforcement actions accounting for almost one-third of the cases, followed by broker-dealer and investment company cases. For examples of some of the cases involving accounting- and/or auditing-related issues see our detailed case studies on American International Group Inc., (app. IX), Federal National Mortgage Corporation ( app. XI), and Qwest Communications International, Inc. (app. XII).

SEC’s Enforcement Resources Have Grown

In our 2002 report, we found that SEC’s enforcement function was strained because of resource challenges and an increased workload; however, as a result of several high-profile corporate failures, and financial reporting fraud, among other things, the Sarbanes-Oxley Act authorized a 65 percent increase in SEC’s 2003 appropriations, which directed the additional funding to be used in certain areas. Specifically, no fewer than 200 positions were to be used to strengthen existing program areas, including enforcement. In fiscal year 2003, enforcement resources increased over 20 percent, including 194 staff in Washington, D.C. and SEC’s regional and district offices. Moreover, between fiscal years 2003 and 2004, enforcement staffing increased about 29 percent.

Accounting- and Auditing- Related Actions Included a Variety of Entities and Individuals

SEC has taken a variety of accounting- and audit-related enforcement actions against various entities and individuals, ranging from public companies and audit firms to CEOs and CPAs. Accounting-related violations identified included fraud, lying to auditors, filing misleading information with SEC, and failing to maintain proper books and records. Investigations can lead to SEC-prompted administrative or federal civil court actions. Depending on the type of proceeding, SEC can seek sanctions that include injunctions, civil money penalties, disgorgement, cease-and-desist orders, suspensions of registration, bars from appearing before the Commission, and bars from participating as an officer or director of a public company. As previously reported, most enforcement actions are settled, with respondents generally consenting to the entry of civil, judicial, or administrative orders without admitting or denying the allegations against them. We found this to be true of the auditing- and accounting-related cases we reviewed as well. For a more detailed discussion of SEC’s enforcement process, see appendix VII.

About 90 percent of the more than 750 actions resolved between March 2002 and September 2005 were brought against companies or their directors, officers, employees, or other parties. Another 10 percent involved audit firms and individuals associated with firms, including audit managers, partners, and engagement auditors. In the cases involving public companies and their officials and related persons, we found that SEC has taken a variety of actions against a wide range of officials and employees. Historically, SEC was reluctant to seek civil monetary penalties against companies in financial fraud cases because such costs would be passed along to shareholders who had already suffered as a result of the violations. In the AAERs reviewed from March 2002 to September 2005, we found that SEC started to take increasingly aggressive actions against public companies, including the levy of millions of dollars in civil money penalties in 2003 and 2004. However, SEC’s position on civil money penalties against public companies continued to evolve. In January 2006, SEC outlined its position on this issue when it announced the filing of two settled actions against McAfee, Inc. and Applix, Inc. In one case the company paid a civil money penalty and in the other, the company did not. According to the release, SEC thought it was important to “provide the maximum possible degree of clarity, consistency, and predictability in explaining the way that its corporate penalty authority will be exercised.” The release discussed how the Sarbanes-Oxley Act changed the ultimate disposition of penalties, because SEC can now take penalties paid by individuals and entities in enforcement actions and add them to disgorgements for the benefit of victims through the Fair Funds provision. Under this provision, civil money penalties that SEC collects no longer go to the Department of Treasury; instead, they can be used to help compensate victims for the losses they experienced, which would include harmed shareholders.

The Commission announced that it planned to more closely review actions involving civil money penalties against public companies and laid out the principles it planned to follow in making such determinations. The overarching principle appears to be that corporate penalties are an essential part of an aggressive and comprehensive enforcement program. In addition, SEC’s view of the appropriateness of the penalty against corporations versus the individuals who actually commit the violations is to be based on two considerations. First, SEC considers whether the corporation received a direct benefit as a result of the violations (e.g., the violation resulted in reduced expenses or higher revenues). Second, the degree to which the penalty will recompensate or further harm injured shareholders. Other factors, SEC will consider are: the need to deter the particular type of offense, the extent of the injury to innocent parties, whether complicity in the violation is widespread throughout the the level of intent on the part of perpetrators, the degree of difficulty in detecting the particular type of offense, the presence or lack of remedial steps by the corporation, and the extent of cooperation with the Commission and other law In our 2002 report, we also noted that Congress, market participants, and others, had questioned the lack of severity of many of the sanctions given the level of investor harm. At least one SEC official, at the time, felt that because monetary penalties are often paid by officer and director insurance policies, or are considered insignificant in relation to the violation, SEC should pursue more officer and director bars. However, the test for imposing officer and director bars was viewed as too restrictive. Since that time, the Sarbanes-Oxley Act changed the threshold for seeking officer and director bars by amending the securities acts’ requirement from “substantial unfitness” to “unfitness,” thereby making it easier for SEC to pursue officer and director bars. From March 2002 through September 2005, SEC obtained officer and director bars against hundreds of officials. Specifically, SEC resolved charges against hundreds of CFOs or chief accounting officers and CEOs with securities fraud or issuer reporting violations between March 2002 and December 2005. See appendixes IX, XI, and XII for a summary of the actions taken by SEC in three of the six cases we analyzed.

SEC may also bring an enforcement action against other individuals such as officers and principals who are not part of top management (other participants and responsible parties). In the AAERs we reviewed, SEC charged such individuals with accounting-related violations that resulted in injunctions, civil monetary penalties, disgorgements, cease-and-desist orders; and officer and director bars. For example, SEC and in some cases the Department of Justice, have filed suit against several senior officers at public companies—including chairmen, chief operating officers, controllers, directors, vice presidents, and clients. These executives have been charged with securities law violations such as fraud, reporting violations, record-keeping violations, and insider trading.

Although the Sarbanes-Oxley Act provided PCAOB enforcement authority over registered public accounting firms and their associated persons (which we discuss below), SEC continues to have the authority to bring actions against accounting firms. In addition to investigating violations of the securities laws, Enforcement investigates improper professional conduct by accountants and other professionals who appear before SEC, and the agency may pursue administrative disciplinary proceedings against these professionals under SEC’s Rules of Practice 102(e). If SEC finds that securities laws have been violated or improper professional conduct has occurred, it can prohibit professionals from appearing before SEC temporarily or permanently. A licensed accountant engages in improper professional conduct if he or she intentionally or knowingly violates an applicable professional standard or engages in either of the two types of negligent conduct defined under the rule. From March 2002 to September 2005, SEC has taken action against numerous firms and dozens of individuals. The actions included injunctions, civil monetary penalties, bars or suspensions from appearing before the Commission, cease- and- desist orders, officer and director bars, and censures.

Newly Created PCAOB Also Took Variety of Enforcement Actions

As mentioned previously, the Sarbanes-Oxley Act authorized PCAOB to conduct investigations concerning any acts or practices, or omissions to act, by registered public accounting firms and persons associated with such firms, or both, that may violate any provision of the act, PCAOB’s rules, the provisions of the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, including SEC rules issued under the act, or professional standards. In May 2004, SEC approved PCAOB’s rules implementing this authority. When PCAOB alleges a violation, it has the authority after an opportunity for a hearing, to impose appropriate sanctions. The sanctions can range from revoking a firm’s registration or barring a person from participating in audits of public companies, to imposing monetary penalties or requirements for remedial measures, such as training, new quality control procedures, or the appointment of an independent monitor.

Between May 2005 and July 2006, PCAOB has instituted and settled five disciplinary proceedings against registered public accounting firms and associated persons. These proceedings dealt with cases involving concealing information from PCAOB and submitting false information to it, in connection with a PCAOB inspection; noncompliance with PCAOB rules, independence standards, and auditing standards in auditing the financial statements; and failing to take prompt and appropriate steps in response to indications that an issuer audit client may have committed an illegal act. The associated sanctions ranged from revoking the firm’s registration, barring the involved individual from being an associated person of a registered public accounting firm, and censuring firms and associated persons.

Conclusions

A variety of factors appear to have contributed to the increased trend in restatements, including increased accountability requirements on the part of company executives; increased focus on ensuring internal controls for financial reporting; increased auditor and regulatory scrutiny (including clarifying guidance); and a general unwillingness on the part of public companies to risk failing to restate, regardless of the significance of the event. Given the new regulatory and oversight structure, and the current operating environment, it is unclear if and when the current trend toward increasing restatements will subside. The number of restatements may continue to increase in the immediate future, as new areas of scrutiny (for example, small public company implementation of the Sarbanes-Oxley Act internal control requirements and hedge accounting rules), by SEC and others, may trigger future restatements similar to the trends experienced after the focus on accounting for leases or income taxes in early 2005. Currently, approximately 60 percent of public companies—generally smaller public companies—have yet to fully implement the internal control requirements of the Sarbanes-Oxley Act, which could also impact the number of restatements. In recent years, the larger public companies’ implementation of Section 404 requirements resulted in many companies announcing financial restatements. Alternatively, the number of restatement announcements could subside after the regulatory and firm changes called for in the Sarbanes-Oxley Act have been fully implemented and allowed to play through.

Companies that announce restatements generally continue to experience decreases in market capitalization in the days around the initial announcement; however, the magnitude of the impact has significantly decreased from the period analyzed in our 2002 report. The exact reason for this decline is unclear, but may include a variety of factors such as investors’ inability to discern the reason for the restatement, varying reactions by investors about what the restatement means (e.g., whether the company is improving its disclosures), or investors’ growing insensitivity to financial statement restatement announcements. These views, in part, are supported by some investor confidence data and research including that, while investor confidence seems to have increased, investors often are unable to decipher the reason for the restatement; restatements may be viewed in various ways by investors, depending on whether they believe that the trend is part of a “cleansing process” (i.e., public companies strengthening their internal controls), or whether they merely reflect technical adjustments for compliance.

SEC improved disclosure of restatement announcements in 2004 by requiring additional information on Form 8-K. However, some public companies continue to announce restatements that result in non-reliance on prior financial statements outside of the required Form 8-K (Item 4.02) filing process. That is, about 17 percent of companies announcing restatements that resulted in non-reliance between August 2004 and September 2005 failed to disclose this information under the appropriate item or failed to file an 8-K at all. While most filed the information under an item other than 4.02 in the Form 8-K, some appeared to have disclosed the information in a Form 10-K or 10-Q, which raises questions inconsistencies between the Form 8-K instructions versus staff questions-and-answers discussion concerning filing requirements under Item 4.02. The result of the potential noncompliance is that some companies continue to restate without consistently informing investors and the general public that such restatements have occurred and that previously issued financial statements should not be relied upon—which raises concerns about compliance with SEC’s revised Form 8-K disclosure requirements and the ongoing transparency and consistency of public disclosures.

Recommendations

To better enable SEC to enforce its regulations and improve the consistency and transparency of information provided to investors about financial restatements, we recommend that SEC take specific actions to improve oversight and compliance of disclosures of certain restatements. First, SEC should direct the head of the Division of Corporation Finance to investigate the instances of potential noncompliance we, and Glass Lewis, identified, and take appropriate corrective action against any companies determined to have filed a deficient filing. Second, SEC should harmonize existing instructions and guidance concerning Item 4.02 by amending the instructions to Form 8-K and other relevant periodic filings to clearly state that an Item 4.02 disclosure on Form 8-K is required for all determinations of non-reliance on previously issued financial statements (Item 4.02), irrespective of whether such information has been disclosed on a periodic report or elsewhere.

Agency Comments and Our Evaluation

We provided a draft of this report to the Chairmen of SEC and PCAOB, for their review and comment. We received written comments from SEC and PCAOB that are summarized below and reprinted in appendixes II and III. Both SEC and PCAOB provided technical comments that were incorporated into the report as appropriate.

In response to our first recommendation that the Division of Corporation Finance investigate the instances of potential noncompliance identified and take appropriate corrective action, the Director of the Division of Corporation Finance stated that SEC appreciated the recommendation and that it will continue its long history of examining instances of potential noncompliance with federal securities laws. Finally, in response to our recommendation that SEC harmonize existing instructions and guidance, SEC stated that it will carefully consider our recommendation to harmonize existing instructions and guidance related to a company’s need to notify the public that previously issued financial statements or results should not be relied upon.

In commenting on the draft report, the Chairman of PCAOB stated that as the organization charged by the Sarbanes-Oxley Act with overseeing the audit of public companies, the report’s findings on the causes of, and trends in restatements by public companies would be useful to PCAOB’s oversight efforts.

As agreed with your office, we plan no further distribution of this report until 30 days from its issuance unless you publicly release its contents sooner. At that time, we will send copies of this report to the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member of the Senate Subcommittee on Securities and Investment, Senate Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking Minority Member, Senate Committee on Governmental Affairs; the Chairman and Ranking Minority Member, House Committee on Financial Services; and other interested congressional committees. We will also send copies to the Chairman of the SEC and the Chairman of the PCAOB and will make copies available to others upon request. In addition, this report is also available on GAO Web site at no charge at http://www.gao.gov.

If you have any questions concerning this report, please contact Orice M. Williams at (202) 512-5837 or williamso@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. See appendix XV for a list of other staff who contributed to the report.