The chosen company for this restatement analysis is the Timberland Company. Generally, the primary reason of the financial restatement is to make some revisions on the financial statements that had been issued earlier. The restatement is primarily done to re-adjust the company’s revenues, expenses and costs. The effects of the financial restatement were evidenced in the company’s debt and equity financing structure (“Yahoo Finance”, 2012).
In conventional company financial analysis, the comparison of debt composition to that of equity is generally referred to as the ratio of debt to equity. This ratio seeks to provide the users of financial information with sufficient understanding of the underlying financial position as regards the control that the outsiders will exercise on the operations of the company. A company with high level of debt composition is deemed highly exposed to outside obligations and therefore will expose the investors to higher levels of financial risks (Lynn & Weirich, 2012). Therefore, the financial informers must ensure that the company strikes a favorable balance between its debt and equity finance composition. The types of debt equity that was present in the company’s restated financial statement were as follows:
|Long term debt||276,000|
|Deferred Long Term Liabilities||921,000|
|Misc Stocks Options Warrants||0|
|Other stockholders equity||95,000|
Timberland Company has also experienced an increased level of other liabilities by slightly over 4 million. Further, the company’s common stock has shown a slight positive change of about $3,000. Retained earnings, however decreased by over twenty million and this can explain the increase in the level of the treasury stock of over 40 million. In addition, Timberland’s capital surplus increased to 328,508,000 up from 319,394,000, thereby ensuring a positive change of over 9 million (Lynn & Weirich, 2012). In the restated financial statements, the interest rates were as follows:
Timberland Company has been exposed to significant levels of interest rates ranging from 0.50 in the current year to 1.71 registered in the year 2008.
The company’s management owes a lot of responsibility to both the investors and the stakeholders for carrying out the financial restatements. The financial restatement carried out on the company’s debt and equity structure impacts a lot on the way the investors and the stockholders would finally react. For instance, it is the responsibility of the company’s management to prepare and produce accurate financial reports to both the investors and the shareholders. Such accuracy would be geared towards producing results that do not appear to be fraudulent in nature. For instance, “it is the duty of the company’s management to invest the shareholders’ funds in the right investment vehicles that would produce maximum yields to the investors” (Ostern, 2011). In case, losses that results from errors committed by the management, the team is held accountable to the investors and the shareholders. The shareholders and the investors have the right to know the accuracy of the financial results presented to them by the management.
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Material misstatements in the financial reports would agitate the investors and the shareholders, who could start selling their stocks in the market, as way of pulling out from the business, before more losses are realized. Under such circumstances, the management team is held responsible owing to the fact that they act as the agency of both the shareholders and the investors. The restatement of the financial reports because of huge losses and debts incurred by the company can lead to bankruptcy petitions. The management team can be fired from their positions due to poor performance and malpractices. The board members of the management can as well be fired, and their bonuses might be reduced in the process (“Yahoo Finance”, 2012).
Several changes can be made on the company’s leadership. For instance, external auditors can be hired to check and verify the financial reports of the company. This group of the external auditors would work alongside the internal auditors to minimize errors and financial mismanagements that can be committed during the financial reports. These reports would be verified and presented to the management members, and by doing this, the weaknesses in the internal controls would be minimized. The basis of the accounting principles could as well be changed. This can be done by incorporating the use of more equity than debt financing, which carries high interest rates. In addition, the company can reduce its operation costs and expenses in order to minimize the losses incurred by the company (Ostern, 2011).
The impact of the company’s leadership team’s “trustworthiness” plays a crucial role in the restatement of the financial statements. The leadership team of the company needs to be trusted by both the shareholders and the investors on their financial reports, which have been restated (Tomassini, 2012). The investors and the shareholders need to understand that errors in the financial reporting might lead to restatement of the financial results. They should not always believe that the management team of the company carries out the restatement of the financial results with the intention of committing fraud or even denying the shareholders their dividends. This is not always the case, and the investors and the shareholders need to trust their management team, who acts as their agents. Though, there is some level of conflict between the company’s management and the shareholders, which comes as a result of conflicting interests. For instance, the management teams can pursue their own personal interests and benefits, instead of concentrating on benefits that are directed towards the shareholders. However, there is need for trust so that the investors, shareholders and the management team can work in unity towards the success and growth of the company.