An Analysis of the Underlying Causes Attributed to Restatements Harvard Case Solution & Analysis


Manipulation is an intentional error or misstatement that has been undertaken by an individual with a purpose to deceive the readers of the financial statements and report increased earnings than the actual one. Such type of error or misstatement is usually committed by the management with a purpose to present their financial statements healthy and attractive to the general public. Manipulation is usually exposed to strict legal actions and lawsuits from the shareholders of the company and management have to give explanations regarding their acts in front of the court of law. The need for such restatement arise when the auditor finds the financial statements of the company inaccurate or not presenting a true and fair view in front of the general public. Then they make inquiries from the management and the accounting personnel regarding the cause behind manipulating the accounting disclosures. One of the major reasons behind manipulating the accounting records is when the company is not capable of meeting their budgeted goals and their earnings are far below, then the estimated trash hold, then the management manipulates the records and represent them healthy and attractive. It is more likely to be reported in the revenue recognition or reserve/allowance areas of a company’s financial statement because these are the potential areas which can increase the wealth and earnings of the company. Since it is caused by an intentional act, so it will have a negative impact over the income statement of the company. Such an error is more likely to decrease the net income of a company and less likely to have no impact over the income statement of the company. Manipulation is also resulted due to a weak internal control environment of an entity because one can only do a fraudulent activity if the company’s internal controls are not effective enough to prevent or detect the fraudulent activity. It is also observed that the ratio of restatements due to manipulation is very low because most of the employees do not dare to take such a step that can harm their future and expose them to heavy legal implications. Such cause of restatement can be reduced by implementing a very strict and effective internal control system because if the company has strong internal controls and strict rules and regulations then employees would not try to manipulate their individual reports to the management. The government regulatory bodies like SEC should also play their role in reducing the risk of manipulation by exercising strict punishments over those not obeying the rules and regulations of such bodies and who are found guilty of committing manipulation in the financial statements. It should impose heavy fines over the top management and the company and even in serious cases should terminate the license of the company. The auditing regulatory bodies should also impose heavy penalties over their members who are found in committing or supporting the act of manipulation in the financial statements.


Complexity refers to the extent to which a particular transaction is complex and difficult to record with the applicable financial reporting framework. It occurs due to the lack of training and knowledge with the personnel who are recording the transaction. If the disclosure shows that the transaction is recorded in a wrong manner or there is a material error in the accounting of the transaction due to the nature of the transaction then the error should be termed as a complexity error. The restatement of this error is usually called upon by the top management when they are reviewing the transaction or by the auditor, because the accounting department of an entity is usually reluctant to show their weakness to the top manager and commit such types of errors. The ratio of such type of error is also very negligible because most of the firms seek the services of professional accountants in the preparation of their financial statements and also provide training to their staff members to eliminate this type of error. Restatements related to the errors in financial statements are usually occurred in the OCI, Equity, and the acquisition or the investment related issues. However, research shows that the risk of error due to complexity issues has been increased due to lack of clarity from the top executives regarding the applicable accounting framework and the legal implications of the country’s laws over the entity. It also occurs due to the increasing misunderstanding between different departments of the company or lack of coordination, which reduces the clarity of information between the department that is responsible for the execution of a particular transaction and the accounting department that is responsible for recording the same. It is equally likely to have both the negative and positive effects over the net income of a company, because it can be termed as both the intentional and unintentional error. Although....................................

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