Financial Restatements: Methods Companies Use to Distort Financial Performance

By Madhav Rajan, Brian Tayan
2008 | Case No. A198

Over the last 10 years, the number of publicly traded companies that have had to restate financial results has risen dramatically. Regardless of whether the restatements stemmed from the aggressive application of accounting standards or the need to correct intentional distortion of results by management, the outcome was often the same: a sudden and significant loss of shareholder value. In many cases, the restatement process led to significant turmoil within the company, including investigations by financial regulators, the resignation of chief executives and other senior officials, wide-scale restructuring and employee layoffs, and lawsuits against the board of directors, auditors, and other involved parties. The effects on the organization were often felt for years, taking a significant financial and reputational toll. This case examines five categories of financial restatements, as defined by Charles W. Mulford and Eugene E. Comiskey: recognizing premature or fictitious revenue, aggressive capitalization and extended amortization of expenses, misreporting assets and liabilities, other income statement items, and problems with cash flow reporting. Examples are provided for each category based on the events at Catalina Marketing, Krispy Kreme, Royal Dutch Shell, Royal Ahold, Nortel Networks, and Parmalat.

This material is available for download by current Stanford GSB students, faculty, and staff, as well as Stanford University alumni. For inquires, contact the Case Writing Officeopen in new window. Download