Study Says Lenders Pay Attention to Financial Restatements

Lora Bentley

The number of financial restatements public companies have filed since Sarbanes-Oxley was enacted in 2002 have increased exponentially, according to Financial Week. And a new study by researchers at Duke, Wilfred Lanier and McMaster Universities found that lenders impose stricter requirements on companies that have filed restatements and that the loans that are awarded are more expensive.

 

For example, says Financial Week writer Andrew Osterland,

... the subsequent loan spreads for companies that made restatements -- measured in basis points over the London interbank offered rate (Libor) -- increased to about 210 basis points from an average of 141. At companies where restatements were a result of fraud rather than error, the spread increased by another 35 basis points, to 245 points over Libor.

It translates to more than $1 million more in interest expenses on a $100 million loan, the story says. And if that isn't enough, loan contracts written post-restatement tend to be secured, for a shorter period, with more restrictions.

 

Response to the study has been varied, according to the story. One on hand, the findings seem to contradict a common belief that the public has become so desensitized to the restatement that no one cares. But the chairman of the Securities and Exchange Commission's Advisory Committee on Financial Reporting, Robert Pozen, points out:

It's an interesting study, but it relates to a period when about 1 percent of public companies were making restatements. Last year about 10 percent of companies restated their financials.


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