M&A Restatements Prevalent, AAA Study Shows —AccountingWeb

“At the same time, the new research provides a vivid reminder of just how hazardous corporate acquisitions are for top management.

 

“All too often, a quick rebuff from the market is only the beginning of the acquiring company’s woes, according to research in the current issue of the American Accounting Association‘s journal Accounting Review. The initial stock price drop frequently proves to be anything but a temporary setback and instead becomes the precursor to manipulation of earnings by company managers culminating in a financial restatement and dismissal of the CEO.

“In the study of some 2,300 firms that made corporate acquisitions, three accounting professors from the University of Arizona’s Eller School of Management find that firms in the lowest quartile in terms of stock market response to the news were about 50 percent more likely than other acquirers to misstate and then have to restate their subsequent finances. This means that the firms failed to apply accounting rules properly or even engaged in outright fraud.

 

“Further, 34 percent of the CEOs in that lowest quartile of the acquirers were dismissed within five years after the merger, as compared to 20 percent of the chiefs in the top quartile.

 

“In sum, the paper finds “a negative association between M&A announcement returns and the probability of issuing materially misstated financial statements following the M&A transaction.”

 

 

• A transaction makes sense when you’re doing it for the right reasons. Make sure the deal is a win-win for both parties, and work with both your legal and financial advisors early on to make certain that the terms make sense. Structuring your deal correctly can help save taxes in the long run and streamline future operations to boost profits. 

• Making the decision to seek a merger or make an acquisition is only the first step. There’s a lot of work to be done beforehand in terms of due diligence and planning. Organize your discovery work like a project manager would to make sure that no information is missed. Your most important asset will be your staff. As a deal develops, activate appropriate department heads to help you make decisions, gather information, and plan for the eventual transaction. They can help you hit the ground running and take full advantage of the benefits of the deal.
• Customer retention needs to be addressed whenever considering a merger or acquisition. It’s human nature ‒ all clients want to feel wanted and that the company cares about them. You can never take a customer for granted, and customers often become fearful that they won’t fit into a new culture. Make sure to create a communications plan for current customers of both parties in the transaction, and set up a follow-up mechanism to check in with them down the road once they’ve had time to experience the “new” company. Planning ahead to communicate properly will help maintain these vital relationships, positioning you for growth once the dust settles.