The effect of restating financial statements on company growth

The effect of restatement of financial statements on company growth

Abstract:

Representation of financial statements for the market contains new information. From the point of view of investors, the re-presentation of financial statements does not only indicate the performance problems of the past period, but it is also considered a kind of prediction of future problems for the company and its management, and it causes investors to lose confidence in the credibility and competence of the management and reduce the quality of the reported profits. The re-presentation of financial statements is a factor that can cast doubt on the reliability of published financial information.

In this research, the impact of re-presentation of financial statements on the growth of the company as a whole and its components, including the growth of internal and external financing, was investigated and it was determined that the re-presentation of accounting in Iran has a negative and insignificant effect on the growth rate of companies, which is more prominent in relation to the growth rate of external financing of companies than the growth rate of their internal financing. According to these results, it can be said that re-presentation by creating an uncertainty about the company's future prospects hinders the company's ability to obtain external financing at a lower cost, and thus the level of cash resources of the company to adopt profitable investment projects decreases, which causes a decrease in the growth of the company, and these effects are more evident for companies that have re-presented due to financial violations.

Key words: re-presentation of financial statements, external financing, company growth

Introduction

Representation of financial statements to the market contains new information. From the point of view of investors, the re-presentation of financial statements does not only indicate the performance problems of the past period, but it is also considered a kind of prediction of future problems for the company and its management, and it causes investors to lose confidence in the credibility and competence of the management and reduce the quality of the reported profits. Re-presentation of financial statements is a factor that can put the reliability of published financial information in an aura of uncertainty. Re-presentation by limiting the company's investments, causes a decrease in the company's growth.

An argument in support of this argument is that the re-presentation is a contractual relationship between the company and parties outside the company, such as: customers, suppliers, etc. It harms and has a negative effect on the company's cash flow, that is, it reduces the level of internal cash resources available for investment.

Another argument is that the restatement of financial statements reduces the company's ability to access lower costs of external financing. Albring, Huang & Pereira, 2013)

In this research, the effects of accounting re-presentation on the growth of the company and its components, including the growth of internal and external financing, have been examined. "Providing summarized and classified information about the financial status, performance and flexibility of the business unit that will be useful for a wide range of users of financial statements in making economic decisions." On the other hand, in the chapter (qualitative characteristics of financial information), the theoretical concepts of financial reporting are stated: users of financial statements should be able to compare financial statements (financial status and performance) over time, as well as with the financial statements of different business units. In this way, it is necessary to measure and present the financial effects of transactions and other similar events within the business unit and over time for that business unit with a consistent procedure, and among different business units, the coordination of the procedure regarding measurement and reporting should be observed. (Sai, Baqarpour and Mousavi, 2013)

What can be concluded from the aforementioned content is that: ((financial information of business units can be useful when it can be compared with similar information of previous years of the same unit, or with similar information of other units that operate in that industry)) but continuous and continuous changes that take place in economic and social conditions, changes in accounting principles and methods, as well as the complexity and high volume of business transactions, sometimes Sometimes it leads to errors or irregularities in financial reporting, which is unavoidable as a result of re-presentation of published financial statements. According to the accepted principles of accounting, financial statements of previous years are presented again for 2 reasons: changes in the accounting procedure (principle) and correction of accounting mistakes.But in this research, it is tried to investigate the factors affecting the re-presentation of accounting in the form of the following 2 groups.

. Re-presentation of financial statements due to accounting measurement error

2. Re-presentation of financial statements due to the existence of financial violations

The meaning of the accounting measurement error is the same as the aforementioned articles, i.e. changes in the accounting procedure and correction of mistakes, and financial violations are cases of failure to pay the company's financial obligations on time, such as: repayment of bank facilities, tax debts, social security debts, other important debts and crimes.

On the other hand, in another part of the accounting standards, it is emphasized: "Financial statements must include comparative items of the previous period, except in cases where an accounting standard has allowed or required another way of acting." Therefore, according to the requirement of providing comparative figures and maintaining the stability of the procedure from one period to another, it is always expected that the figure presented for each financial element in the financial reports of the current period is equal to the figure presented again for the same period in the financial reports of the next year. But in some cases, due to the reasons mentioned, this equality is not expected.

The correction of the mistakes that occurred in the financial statements should not be done by including it in the profit and loss of the current year, but it should be achieved by re-presenting the figures of the financial statements of the previous year or years. If there is a change in the accounting procedure, the figures of the current year will be reflected based on the new procedure and the comparative figures of the previous years will be presented again based on the new procedure.

Clause 38 of Iran Accounting Standard 6 points out: the effect of annual adjustments should be reflected in the financial statements through the correction of the accumulated profit (loss) balance at the beginning of the period. Comparative financial statement items should also be restated, unless this is impractical. In such circumstances, the matter should be disclosed in the explanatory notes. Also, the amount and nature of the items constituting the annual adjustments and the justifications for the change in the accounting procedure and the fact that the comparative items of the financial statements have been re-presented (or the impracticality of re-presenting) should be disclosed in the explanatory notes. Financial statements are an important mechanism for transferring company-specific information to shareholders. Although the financial statements are prepared in accordance with the generally accepted accounting principles (GAAP), accounting standards create powers for managers in cases that can inflate the financial statements (balance sheet and profit and loss) and ultimately lead to the re-presentation of financial statements. In fact, the re-presented financial statements provide clear and explicit messages and signs about the unreliability of the financial statements of the past periods and their low quality. The Securities and Exchange Commission (SEC) describes restatement of financial statements as: "the most visible indicator of incorrect accounting and a source of new research."

In this research, the effects of restatement of financial statements on the growth of the company as a whole and its components, including the growth of external and internal financing, have been investigated in order to determine that the restatement of accounting has a greater adverse effect on the growth rate of the company's external financing.

Restatement is potentially costly for the companies involved. The re-presentation deprives investors of the confidence of the company's disclosure and reduces the demand for the company's securities and limits the opportunities in front of it, which ultimately leads to a significant decrease in the company's market value. Therefore, following the re-presentation, investors' expectations about future cash flows and its expected rate of return will change. In general, it is said that the market's reaction to the announcement of re-presentation of financial statements is negative. The possible reasons for this negative market reaction are:

. Restatement conveys new news and information to the market indicating the reduction of expected future cash flows.

It is a sign of a weak accounting information and reporting system and probably a turning point in relation to the occurrence of management problems of the company.

. It is a sign of management's opportunistic behavior and it shows that the previously reported profits should be corrected due to the use of unaccepted methods, estimates and deliberate and inadvertent mistakes.

Companies that are faced with restatements in their financial statements bear more cost of financing, especially companies that have external financing.