Restatement refers to the revision and publication of the previous financial statements of a company (Rezaee, 2005). A restatement is important when it is verified so that there is material inaccuracy in previous statement. Certainly, restatement of the financial statements results from such factors as fraud, accounting errors, clerical errors, misrepresentation or noncompliance with the general accounting principles (Rezaee, 2005). It is true that a negative restatement normally shakes the confidence of the investors, and in addition, results to a decline in the prices of stocks (Rezaee, 2005).
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Apollo Group is one of the publicly traded companies, located in South Phoenix, Arizona. The corporation owns and runs various higher learning institutions, including Axia College, Western International University, University of Phoenix and the Institute for Professional Development (Pederson, 2008). Furthermore, Apollo Group also owns BPP University College of Professional Studies, UNIACC College and ULA College (Pederson, 2008). Apollo Group Inc. restated its financial statement and on May 2007 the company became recent on Securities and Exchange Commission (SEC) fillings.
In 2006, Apollo Group Inc obtained a subpoena from the United States attorney, linking to grants in the stock option (Dow Jones and Company, Inc. 2007). The company hired an external auditing firm with an aim of reviewing its practices in the stock options as a result of a brokerage report which raised queries regarding whether the company had backdated its previous option grants. Apollo Group Inc. obtained a letter from the Securities and Exchange Commission concerning an informal investigation on the firm’s stock-option grants, and this made the company restate its past outcomes due to problems with the previous grants (Dow Jones and Company, Inc. 2007). During this period the company’s financial chief quitted, quoting personal reasons. The review of the stock options by the external auditing firm revealed that Apollo Group had misdated specific stock options grants and the company’s former officers covered the errors in the grant authorization procedure. In addition, the external firm put forth that Apollo Group was to face considerable tax liability as a result of misapplication of IRS rules in the previous years. On May 2007 Apollo Group became recent on Securities and Exchange Commission fillings and recorded, due to the restatement for the financial years 1994 to 2005 (Dow Jones and Company, Inc. 2007).
Certainly, the negative restatement normally has various effects on the company. For instance, one of the major impacts is that restatement usually shakes the confidence of the investors as the public trust of the company becomes eroded, and as a result, leads to a decrease in the prices of stocks (Rezaee, 2005). In certain instance, some companies have been reported to have collapsed and gone bankrupt due to negative restatement (WorldCom and Enron) (Gertsen et al., 2006).
It is true that financial restatement results to investors and stakeholders loosing their confidence in the company’s management. Moreover, managers are normally discredited in case of a restatement. As a result, the management has an essential responsibility to play in order to ensure that such persons gain their confidence again both to the company itself and to the management. For instance, the management should confirm the problem, take the blame, and besides, it should undertake a straightforward/open communication regarding the issue in question and the action necessitated to resolve it (Gertsen et al., 2006). In addition, the company’s management should take governance measures and act in conformity with the norms.
Apollo Group company leadership should make various changes relating to internal controls, accounting principles among other initiatives as a result of the need to restate the financial statement. It is true that errors in the company financial statement occurred due to mathematical errors, oversight in application of the principles of accounting or mistake of facts, which subsisted during the preparation of the financial statements. Consequently, the Apollo Group Inc should make use of another audit firm that is highly credited for its efficiency, as this will also assist in gaining the investors confidence once more. In addition, the company should make certain that adequate and correct data is gathered, as this will prevent any probability of providing incorrect accounting estimates, which may result to offering incorrect position of the company both in its stocks and financially. Besides, the company should ensure that errors in the application of accounting principles linked to classification, amount, disclosure and manner of presentation are avoided.
Indeed, in accounting, most estimates and judgments require to be made on the basis of high level of doubt, and their precision may be assessed only afterwards (Gertsen et al., 2006). As a result, new managers may be specifically negative regarding the previous judgments made by past managers. Furthermore, earlier settled problems of accounting judgment and estimates are likely to be revisited. The extension of the investigation scope results to scrutiny of the responsibility of past managers in accounting decisions. This results to discrediting of the management even from immaterial things and minor events. It is true that credibility of managers is a valuable commodity; however, it might be damaged easily in case of a financial restatement situation (Gertsen et al., 2006). In fact, damage of manager’s trustworthiness is one of the major reasons as to why most investors react more negatively towards a financial restatement instead of focusing at the income effects. Research has proven that low manager’s trustworthiness affects a company in a negative manner and therefore, publicly discrediting managers strongly sway the market opinion of intention on top of distortion, thus affecting the company and its market value (Gertsen et al., 2006).