Fitch on Global Accounting Risks: 2005 is the Year of Restatement

Business Wire, March 14, 2005

LONDON -- The year 2005 will be the "Year of the Restatement," according to a new accounting outlook report from Fitch Ratings. Outside the U.S., this will result from thousands of companies switching from local accounting standards to International Financial Reporting Standards (IFRS) and restating their 2004 balance sheets. For U.S. companies, Fitch anticipates many accounting restatements when 2004 annual financial statements are reported, resulting from the first year of enforcement of Sarbanes Oxley Section 404 (SOX 404) combined with a reinvigorated auditing profession operating under the watchful eye of the Public Company Accounting Oversight Board (PCAOB). These factors are resulting in more rigorous interpretation and reevaluation of the way financial standards are applied.

While restatements are usually received by the market as a "negative," overall, this exercise should be positive for investors. However, implementation of the new accounting regime is not without risk, as described in this report, and investors face a number of accounting risks and challenges in 2005 and beyond.

"Investors are going to have to take a close look at restatements to determine if the new numbers are merely a different way of saying what they already knew, or whether a new underlying message has been revealed," said report co-author Bridget Gandy.

The report warns of several accounting risk drivers in 2005, including:

--IFRS: wholesale adoption of IFRS will create many challenges as companies make transition from local accounting standards to international standards;

--SOX 404: increased accounting adjustments are surfacing with implementation of SOX 404;

--Financial Disclosure: the SEC has made it clear that improved disclosure and transparency is paramount;

--Derivatives: remain an area of extreme complexity that raises the risk of restatements;

--Pensions and OPEBs: assumptions vis-a-vis defined benefit pension plans and health care costs will continue to be a 2005 headline issue, and for many companies, IFRS will bring additional pension liabilities onto the balance sheet;

--M&A: the recent rise in M&A activity in the U.S. heightens the risk of internal control breakdowns, potentially aggressive accounting, and restatement risk;

--Revenue Recognition: standard setters are moving to more "fair value" revenue recognition, creating challenges in reconciling earnings to cash flow.

The preceding are excerpts from a new report "Accounting and Financial Reporting Risk: 2005 Global Outlook," available on the Fitch Ratings web site at www.fitchratings.com.