Restatement Of Financial Statements: General Cable Corporation Essay.

From reading The Wall Street Journal, an individual can see that there are instances in which companies go back and restate prior years' financial statements--usually including the prior years' income statements. Those readers might ask why any restatement is necessary, considering that the financial statements had been audited and had received an unqualified (“clean”) opinion. Learn what you can about the situation, and prepare a report for the teacher, the class, and possibly other persons, which provides at least the following information: the name of the company involvedthe years of financial statements involved why there was a problem with the financial statements as originally issued the auditor(s) of those financial statements as originally issued any statements by the auditor(s)information about lawsuits filed against the company, its officers, its directors, its uditors, and any other parties you could find, which were filed as a result of the situation listed in part (c) above the traditional audit steps / processes / procedures which ought to have brought the issue / problem / disagreement to the attention of the individuals performing the audit, if any such steps / processes / procedures exist Be sure to check the AICPA Audit and Accounting Manual. We probably do not have a current issue in the library, so use what we do have. any audit steps / processes / procedures to be employed on future audits of that company, with the intention that the audit firm will become aware of a problem and be able to resolve it before issuing an audit report for that entity.

The results of any company are determined only through the balance sheet and the profit and loss statement for the particular year. These along with the statement of changes in equity and the cash flows statement along with the notes to the accounts are regarded as the financial statements. The report revolves through the major event which is known as the restatement of the financial statements. Restatement is done only in case of the exceptional and rare circumstances. For the purpose of the report the company – General Cable Corporation has been selected. The report will start with the meaning of the restatement of the financial statements and why it is needed. Secondly, the company has been described as to what is the name of company, its location, nature of business and etc. Thirdly and majorly the reasons will cited as to what are the circumstances that have led the company to restate the financial statements of the company. Fourthly and also majorly the audit procedures have been discussed. Under this the traditional audit procedures that have been adopted by the company has been detailed and how the same have led to the restatement of the financial statements. The report has been ended with the appropriate conclusion and recommendation.      

The company that has been chosen for the purpose of the report is the General Cable Corporation. Its headquarters are located in Kentucky, United States of America. The company is into the business of purchase and sale of the wires and the cable wires and is one of the leading global manufacturers. The company is into the business and existence for the last one hundred and seventy years. The company has been operating through the three locations – North America, Europe and Mediterranean and Rest of the World referred as Asia and Pacific regions. In this report, two subsidiaries of the companies will be referred to. These are General Cable Brasil and General Cable do Brasil. Both the companies are the indirect subsidiaries of the company.

Company has been operating since its inception and has gained the advantage over the years. But the major discrepancies have been occurred under these subsidiaries. In this report the period from 2008 to 2012 will be discussed with reference to the financial statements as disclosed in the annual report of the company for that particular year end (Meek, 2010).  

Restatement of financial statements means to restate the figures as shown in the financial statements. Financial statements are incorporated in the annual report only when the auditor provides its auditors report and board along with the shareholders of the company approves the financial statements. If any discrepancy is noticed after the financial statements are get approved then it can be corrected only through the restatement of the financial statements or the revision thereof (Lev, 2010).

Reasons for Restatement of Financial Statements

The discrepancy is generally noticed either it is either pointed out by the external auditor appointed by the company to do so or appointed by the government authority or by the employee of the company who knows the truth of the violation of the provisions of the relevant statutes. In General Cable Corporation, second condition has been prevailed. It comes to the notice when the Chief Financial Officer of Brazil without considering the protests of the rest of World Chief Executive Officer and Chief Financial Officer declares that she will inform the discrepancy to the management of the company, then only the rest of World Chief Executive Officer and Chief Financial Officer informs the management and accordingly the action has taken place to restate the financial statements (Aier, 2015 ; Efendi, 2014).  

In the annual report for the financial year ending 30^th of June 2012, the company has mentioned the clause as to why the financial statements have been restated. Following are the reasons and the circumstances of the restatement of the financial statements. 

Accounting errors relating to Inventory – The company segment operating in Brazil has been in the process of manipulating inventories level. From the year of 2008 till 2012, the company has been in the process of understating the level of the cost of sales and overstating the level of the inventories. The flaw has been majorly due to the accounting of the inventory in the enterprise resource planning and the missing inventory. The flaw has been shielded with the collusion of the cost accounting personnel who has directed to punch the figures of the inventory in the system manually of the items which in actual does not exist in the company. Secondly, there has been no process of reconciliation with the general ledger. It means that the personnel involved in the accounting and administration knows about the fact of missing inventory and accounting errors. They have directed the others to not to disclose the same either to the management of general cable Corporation nor to the external auditors. Following is the table which depicts as to how inventory has been overstated and cost of sales has been understated leading to the overstatement of the net income of the company (Company Official Website, 2012).

The above table depicts that due to the overstatement of net income, the earnings price per share of the company will also get increased.

Audit Procedures Undertaken

 The major reason for the escapement of the discrepancy is that the most of the system was manual and decentralized and thus there is very less or weak internal control has been employed there (Doyle, 2014; Doyle, 2013). Due to which the General Cable Care management was not able to check the flaws. In the meantime, it has come to the notice of the finance managers, then to chief executive officer and financial officer and most importantly also to the rest of world  chief executive officer and financial officer but nothing has been done. It is because all have been directed to not to disclose it to the General Cable Care Management. At last the Chief Financial Officer of Brazil disclosed the fact due to which the restatement of accounts has been considered (Srinivasan, 2015).

Incorrect Revenue Recognition – As per the United States Generally Accepted Accounting principles, the revenue can be recognized even if the seller does not send the goods to the buyer and still recognize the amount of sales as revenue. In this goods have been kept on hold and the revenue is recognized. There are number of the conditions which the company is required to follow to have the easy recognition of revenue (Newberry, 2013). These are :

• The ownership risk must have been transferred to the buyer
• The purchaser shall make the declaration in writing that the goods shall be purchased by him
• The purchaser shall make an application with request to keep the goods for hold and such hold shall be for the business expediency
• Date shall be mentioned as to when the goods will be shipped and delivered
• No obligations shall be pending either from the buyer or from the seller. 

It has been mentioned in the decided case that revenue has been recognized without the fulfillment of the conditions that are mentioned in the generally accepted accounting principles. Due to this, the net income has been overstated (Francis, 2010). This discrepancy has come into the notice when the inventory figures are being checked along with the purchase and sale details.   

Despite of having the audit regularly done at the end of the financial year, how the discrepancies has prevailed for the consecutive period of four years. The flaw has been persisting from the beginning of the year 2008 and ended on September 2012 when the Chief Financial Officer of Brazil has put her step forward (Abbott, 2014 ; Raghunandan, 2013).

The major reason for accounting errors goes with the auditor. If the auditors would have checked the accounting of the inventory and revenue recognition then such flaws and discrepancies would not have been occurred leading to the huge penalty. The auditors should have applied the substantive auditing procedures along with the compliance procedures.    

Conclusion And Recommendation 

Restatement of the financial statements is the task which is done only because of the violation of standards set by the accounting bodies or of the violation of any of the rules or the regulations of the recognized stock exchanges. General Cable Corporation financial statements have been restated only because of the faults and flaws committed by their cost accounting personnel in convulsion with the other personnel of the company. It would not have been restated if there would have been the timely disclosure of the same. There has been the violation of the accounting standards and principles and of the rules laid down by the Securities Exchange Commission of the United States of America. The company has been required to pay the huge penalty. In order to conclude the report, the restatement has been done only because of the negligence on the part of the Chief Executive Officer and Chief Financial Officer of the Rest of the World and flaws on the part of the cost accounting personnel.

It is recommended to have the system in the organization where the flaws and the faults can be detected within time and necessary action can be taken. For instance the system of the concurrent audit on monthly basis shall be incorporated along with the internal audit function of the company.      

Abbott, L, (2014), “Audit committee characteristics and restatements”, Auditing: A Journal of Practice & Theory, 23(1), 69-87.

Aier, J. K, (2015), “The financial expertise of CFOs and accounting restatements” Accounting Horizons, 19(3), 123-135.

Company Official Website, (2012), “Annual Report”, available on https://www.generalcable.com/  accessed on 21-04-2018.

Doyle, J., (2014), “Determinants of weaknesses in internal control over financial reporting”, Journal of accounting and Economics, 44(1-2), 193-223.

Doyle, J, (2013), “Accruals quality and internal control over financial reporting”, The Accounting Review, 82(5), 1141-1170.

Efendi, J, (2014), “Why do corporate managers misstate financial statements? The role of option compensation and other factors” Journal of financial economics, 85(3), 667-708.

Francis, J, (2010), “Have financial statements lost their relevance?” Journal of accounting Research, 37(2), 319-352.

Lev, B., (2010), “The boundaries of financial reporting and how to extend them” Journal of Accounting research, 37(2), 353-385.

Meek, G. K.,(2010), “Factors influencing voluntary annual report disclosures by US, UK and continental European multinational corporations” Journal of international business studies, 26(3), 555-572.

Newberry J, (2013), “General Cable Blames Theft for Misstatement”, available on https://www.bizjournals.com/cincinnati/news/2013/02/25/general-cable-blames-theft-for.html   accessed on 21-04-2018

Raghunandan, J, (2013), “Initial evidence on the association between non audit fees and restated financial statements”, Accounting Horizons, 17(3), 223-234.

Srinivasan, S. (2015), “Consequences of financial reporting failure for outside directors: Evidence from accounting restatements and audit committee members” Journal of Accounting Research, 43(2), 291-334.