USA Topside Adjustments Question


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Hello,

Situation of a Company:

2017 Income Statement was overstated by $10M. These errors were caught by Auditors. This was corrected via a Topside entry in 2018.
2018 Financials from Company's Oracle system now properly reflect the $10M adjustment, but for 2018 reporting purposes, Management is backing out those entries each month to reflect the true 2018 picture. Each month and year end has an "adjusted" set of financial statements.


2018 Income Statement was understated by $10M. These were caught by Auditors. This was corrected via another Topside entry in 2019.
2019 Financials from the system now properly reflects both Topside entries, but for reporting purposes, Management is manually backing out both years every month when they report out.

Is this normal for Topside entries? I guess I would have thought that once the topside entries are made, that would be the new balance on all the F/S going forward.

TIA!
 
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For an under/ overstated accounts reporting exception to have an impact across multiple fiscal years, we'd be talking about perhaps an expense with a cost behavior similar to, say, depreciation. That is, it sounds like a fixed cost accounting assumption and management's interpretation of that assumption thereof.

And truly the auditors and executive management are known to quibble over depreciation methodologies.

Topside entries by their definition happen off the books. So, to answer your question, no they would not be reflected going forward. Instead, as you described, a manual refiguring needs to happen on an ongoing basis. Once the auditor's adjusting entries are made and the fiscal year books are closed, only a restatement on proforma basis can communicate any discretionary reporting changes enacted by management.

And so that leads to another question, which is who is reading the auditor's report. If this is a closely held corporation not publicly traded, then that might be why this is happening. As long as the company is not breaking with IRS codes, or misleading potential / existing investors / lenders, it's something of a non-issue. The conversation might go something like this at the BoD meeting, "Gentlemen, as CFO I can attest that the auditor's adjusting entries while not inaccurate are not applicable to our interpretation of financial reporting." Again, since this company is not filing 10k statements for nasdaq, there aren't any upset shareholders to file suit for malfeasance of any kind.

It's really situational, and I'm working with a lot of speculative assumptions as far as this scenario goes. Feel free to fill in the blanks and we'll go from there.
 
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Thank you so much Dave! I'm sorry I haven't responded back sooner...it's been busy here.

There are too many blanks to fill. I guess I was worried my company was doing something sketchy, because they are manually adjusting their F/S in excel every single month for years. It just seemed like such a crazy manual process to even be normal.
 

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