The Impact of Financial Restatement on Stock

Financial Restatement Analysis
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Financial Restatement Analysis
A financial restatement entails a revision of an earlier version of a financial statement. It involves adjusting the previously reported revenue and expenses with a core objective of addressing any errors while reflecting any changes to the accounting principles. In some instances, organizations utilize financial statement restatement in addressing security-related issues. For example, Hertz Global Holdings Inc. is a car rental corporation that operates in about 150 countries. The corporation is listed at NYSE trading under the HTZ ticker. Firefly, Dollar, Thrifty, and Hertz are some of the company’s brands in over 1635 airport locations across the United States. As such, Hertz Global Holdings Inc. has emerged as one of the largest car rental entity holdings globally.
According to a review of Hertz Global Holdings Inc.’s financial statement, a misstatement of pretax income over various reporting periods resulted in far-reaching accounting errors. One of the significant findings on July 16, 2015, the company had made restatements from previous years, including the revisions in early 2014 that reduced the earlier reported GAAP pretax by $235 million. In addition, inappropriate practices at the company resulted in numerous errors, such as understatement of expenses and inflated income. Therefore, it was important to adjust books of record based on the amendment of the overstated income.
Factors that Led to Restatement
Hertz Global Holdings Inc.’s management ordered a restatement of financial statements following an investigation that revealed weaknesses in the company’s internal control procedures. According to the company, restated financial statements failed to meet the company’s target for pretax income by a total of $207 million. Besides, the company identified ineffective accounting procedures that resulted in errors relating to capitalization. Furthermore, the company had encountered a depreciation of non-fleet items, uncollectable allowances for accounts, and other forms of non-financial derivatives (Kizil & Kasbasi, 2018). After the audit committee realized the errors, they suggested restating financial statements to correct underlying errors. Besides, the committee ordered a review of the financial statement while making appropriate adjustments to annual reports.
The Impact of Financial Restatement on Stock
The stock prices for Hertz Global Holdings Inc. declined by 30% just a few months before the audit committee suggested restating financial statements for 2011-2013. Besides, the company realized a decline in net income by 26%. Following the plan to restate financial statements, the company’s stock prices shot by over 20% (Hertz Global Holdings Reports 2015 Fourth Quarter and Full-Year Financial Results n.d). The stock prices were trading at $20.47 by the time of the restatement of financial statements. As a result, the management decided to purchase back its stock worth $1 billion and readjust its rental unit to an independent entity. Notably, the restatement improved stock valuation, resulting in a savings plan worth $300 million. Furthermore, the EBITDA...