Increased SEC Interest in Restatements

Investigations Insider | What executive officers and audit committees should know

Michele Meadows

Michele Meadows

Partner, Accounting Advisory Services, KPMG US

+1 312-665-2262

Wade Fanning

Wade Fanning

Director, Accounting Advisory Services, KPMG US

+1 312-665-2017

Each December, the AICPA and CIMA Conference on Current SEC and PCAOB Developments1 provides an update on the latest accounting and reporting issues affecting SEC registrants and their auditors.  Many in the accounting profession pay close attention to the comments made by the panelists from the SEC and FASB staffs in the hopes of getting a glimpse of what might be the focus of regulators in the upcoming earnings season.  The SEC’s increased interest in an old matter—restatements—was one of the highlights of this year’s conference.

The leading issue when addressing accounting errors is evaluating the way in which the error should be corrected in a registrant’s financial statements based on materiality.  In a ‘Big R’ restatement, prior-period financial statements are restated and reissued, and users are notified that financial statements previously filed with the SEC should no longer be relied upon, whereas in a ‘little r’ restatement, errors are corrected in current-period comparative financial statements by revising the prior-period information the next time financial statements are issued, without reissuing the prior-period financial statements.  The materiality determination requires the evaluation of both qualitative and quantitative factors, leading to a significant amount of management judgement, in some circumstances. 

During his keynote conference remarks, and in his statement released on the same day2, the SEC’s Acting Chief Accountant, Paul Munter noted that while the rulemaking and guidance surrounding the evaluation of materiality has not changed during the past ten years, the use of ‘little r’ restatements has grown from 35 percent of all restatements in 2005 to nearly 76 percent in 2021. In a statement released on March 9, 20223, Mr. Munter noted “the determination of whether an error is material is an objective assessment focused on whether there is a substantial likelihood it is important to the reasonable investor” and, therefore, “should put aside any potential bias of the registrant, auditor, or audit committee.”

Certainly, a ‘Big R’ restatement can result in negative consequences to a registrant in the marketplace, such as debt covenant compliance issues, stock price volatility, reduced investor and analyst confidence, and even shareholder lawsuits. However, there is also a potential additional looming impact specifically targeted at the incentive-based compensation received by a registrant’s former and current executives that currently seems to be top of mind with the SEC. 

As a reminder, in 2015 the SEC Staff proposed amendments and new rules to implement Section 954 of Dodd-Frank4, which would require, among other things, registrants to adopt a compliant compensation recovery policy5. If enacted, recovery or “clawback” under the 2015 proposal would be triggered “in the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws” as used in the Dodd-Frank Act (“Recovery Trigger”).   Therefore, a registrant’s determination of whether it has a ‘Big R’ or a ‘little r’ could have a direct impact on a registrant’s executive officer compensation.

The SEC reopened the comment period for its 2015 proposed rule in an October 2021 Press Release6 noting concerns have been expressed that issuers may not be making appropriate materiality determinations for accounting errors.  Among other things, the SEC requested comment on whether the Recovery Trigger should be read more broadly than initially proposed to include restatements required to correct errors that were not material to those previously issued financial statements, but would result in a material misstatement if (a) the errors were left uncorrected in the current report or (b) the error correction was recognized in the current period. This expanded definition would thus include ‘little r” restatements.  The comment period closed on November 22, 2021, and the SEC received over 40 letters in response to the request for comment.

In his statements, Mr. Munter reemphasized key considerations in evaluating the materiality of errors and suggested that the SEC is taking an increased interest in the potential bias toward ‘little r’ restatements to avoid executive compensation recoveries.

Action items when accounting errors are identified

When accounting errors are identified, senior management and audit committees are advised to verify that the registrant’s analysis and conclusions surrounding the correction of accounting errors are in alignment with the comments by the SEC and related authoritative guidance. Following are some key helpful reminders for registrants:

  • A registrant’s materiality assessment, often referred to as a “SAB 99 Analysis”, must consider both qualitative and quantitative factors, utilizing the authoritative guidance7:
    • Mr. Munter noted that the larger an error becomes the more challenging it is for qualitative factors to overcome the magnitude.  Thus, registrants should be cautious in concluding that qualitative factors would be able to overcome the magnitude of the error and allow them to conclude that the restatement to correct the error is a ‘little r’ restatement.  The magnitude of the error(s) often cannot be overcome by qualitative factors; and
    • A quantitatively immaterial error can be considered material based on qualitative factors, resulting in the need for a ‘Big R’ restatement.
  • A registrant’s SAB 99 Analysis should be a comprehensive document that is reviewed with the Audit Committee and external auditors: 
    • A review by the audit committee can mitigate risk of any potential management bias in the analysis and conclusions impacting a Recovery Trigger; and
    • It is not uncommon in the Comment Letter process for the SEC to request detailed information supporting management’s conclusions; being well prepared in advance of a potential SEC comment letter is advisable to mitigate against a protracted comment letter process and potential SEC disagreement with management’s conclusions.
  • In conjunction with a SAB 99 Analysis, management should also consider and document the impacts of the identified errors on Internal Control over Financial Reporting (ICFR):
    • There is generally a presumption that a ‘Big R’ restatement will go hand in hand with one or more material weaknesses; and
    • A material weakness can, and often is, present when a ‘little r’ restatement is identified.


  1. KPMG’s full report on the important messages coming from this year’s conference can be viewed at: 2021 AICPA Conference on Current SEC & PCAOB Developments
  2. Source: | Statement on OCA’s Continued Focus on High Quality Financial Reporting in a Complex Environment
  3. Source: | Assessing Materiality: Focusing on the Reasonable Investor When Evaluating Errors
  4. Source: | Proposed Rule: Listing Standards for Recovery of Erroneously Awarded Compensation
  5. KPMG’s publication summarizing the SEC’s proposal can be viewed at: Defining Issues - Issue 32, 2015/07 - SEC Rule Addresses Clawback of Executive Compensation
  6. Source: | SEC Reopens Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation. The reopened comment period ended on November 22, 2021.
  7. Source: Financial Accounting Standards Board Accounting Standards Codification No. 250, Presentation of Financial Statements; Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 99, Materiality; and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements


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