Restatement Wrap-Up: 2013 By The Numbers

September 15, 2014

Westlaw JournalsUnder Generally Accepted Accounting Principles (GAAP), most errors in previously issued financial statements are corrected via an amendment called a “restatement.” Restatement is a dread word in corporate accounting circles. One commentator likened a restatement to a “death in the family.”

In 2013, the most excruciating example of this maxim was the long restatement of Idle Media Inc. (Idle), owner of the mixtape distribution site DatPiff. Idle became an SEC registrant in June 2012 when it filed a Form 10 reporting its merger with National Golf Emporium. The trouble began immediately. In January  2013, Idle announced that “[i]n connection with the review of the Form 10 by the Securities and Exchange Commission,” financial statement errors were discovered related to “revenues and expenses incorrectly allocated to Zoeter, LLC, the Company’s majority shareholder … owned by Marcus Frasier, Chief Executive Officer and President of the Company.” Idle’s Form 10 had also treated Zoeter as a variable interest entity, but Idle determined this too was an error (8-K, IDLE MEDIA INC, January 15, 2013).

GAAP requires that the financial statements of certain types of pass-through vehicles, known as “Variable Interest Entities” (VIE), be combined with the financial statement of any upstream entity obligated to provide the VIE with funding or absorb its losses. GAAP calls the resulting financial statement a “consolidation.” The object of consolidating the financial statement of the VIE with that of its sponsor is to create a more transparent financial statement. Idle’s misallocated revenue, combined with its treatment of Zoeter as a VIE, created the false impression that Idle had conducted business that was actually attributable to DatPiff.

SEC reporting companies proceed through the restatement gauntlet under the watchful eye of the SEC, and just two days later, the SEC asked Idle for more information, specifically “the facts and circumstances behind … accounting errors and why your previous accounting did not comply with GAAP” (IDLE MEDIA INC, SEC Staff Comment, 8-K, January 17, 2013). In an amended filing, Idle explained that although DatPiff was transferred to a subsidiary, “after the transfer date, Zoeter, LLC continued to receive cash generated by, and make cash disbursements related to, the website because the bank and PayPal accounts connected with were owned by Zoeter” (8-K/A, IDLE MEDIA INC, January 28, 2013).

Not to be mollified, the SEC sought more detail two days later: “[p]lease clearly disclose when you became aware that revenues recorded by Zoeter, LLC were allocable to DatPiff, LLC, that is, if it was subsequent to the determination that Zoeter, LLC should not be consolidated” (IDLE MEDIA INC, SEC Staff Comment, 8-K/A, January 31, 2013). The exchange continued in this manner – through two more comment letters, two issuer responses, and two more amendments to the form 8-K – until the end of February. In August, Idle announced it had fewer than 500 shareholders and intended to terminate its registration.

Most of 2013’s restatements do not appear to have been so complex. In 84% of restatements, the only filing is a single form 8-K. Nine percent of registrants filed an 8-K and one amendment. The SEC commented on 51 filings, or 19%. Only a very small numbers of registrants found it necessary to file multiple amendments, or more than one 8-K.


Most errors were caught early. A majority of 2013’s restatements were announced in the first half of  the year.


Most of the errors discovered were not longstanding. 37% of companies were required to restate either one audit cycle, or just one quarter.