Financial Restatement 2009 Was a Stellar Year Essay

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Financial Restatement

2009 was a stellar year in terms of corporate financial restatements; just 630 U.S. companies reported 674 accounting problems serious enough to warrant a restatement, a dramatic 24% decline from the number of companies with accounting problems in 2008" (Krantz, M. March 1, 2010). However, for Citizens First Bancorp Inc., 2009 was not a year in which to celebrate. In the first and second quarters Citizens was forced to restate their earnings based on two separate incidents, the first involving "an accounting error on a $7.5 million impairment of its deferred tax valuation allowance" (Barba, R. October 20, 2009). Second a regulatory action by the Federal Deposit Insurance Corporation (FDIC), which involved allegations of "inappropriate behavior at the company, including removing unfavorable appraisals from the loan files, in an attempt to avoid the recognition of additional loan losses" (Barba, R. October 20, 2009). The FDIC required Citizens to increase their loan loss allowances by 52% from their reported 35.3 million levels. "The two actions together moved the bank from adequately capitalized to undercapitalized" (Barba, R. October 20, 2009). Examining both of these restatements will allow for the explication of the specific accounting principles involved, and the subsequent effects which the restatements have on the company's financials and stockholders.

The first quarter restatement involving the accounting error on deferred tax valuation "represents timing differences in the recognition of certain tax benefits for accounting and income tax purposes, including the expected value of future tax savings that will be available to the Company to offset future taxable income through the carry forward of net operating losses" (GlobeNewswire.

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October 6, 2010). Succinctly, Citizens initially overstated their tax deferred asset allowance, and now "it must essentially write down the deferred tax asset, which it does by creating a "valuation allowance" on its balance sheet. That valuation allowance cuts into income reported to investors and can hit a portion of a bank's regulatory capital, as well" (Alloway, T. November 4, 2010). The write down presented the problem for Citizens. Amidst the tumult of the financial crisis and its aftermath, banks are being forced to hold more tier one capital. A problem though is that "DTAs grew in dollar terms by nearly 300% over the 12-months to June 30, 2009 and now account for 10.7% of equity for U.S. banks, on average" (Alloway, T. November 4, 2010). The FDIC is now keeping a much closer eye on banks levels of tier one capital, and for Citizens the restatement pushed their capital levels below what is considered well capitalized.

The second restatement regarding the increased loan loss provision deals with recognition that the assets on their books were not valued accurately, loans did not have adequate collateral backing them, and that future defaults on loans would be greater than originally anticipated. Citizens Bancorp is not alone in the increases in loan loss provisions. "Many community banks have failed to come to terms with the true value of their assets" (Barba, R. October 20, 2009). As with the write down of the tax deferred assets, the increase in loan loss provision also affects the tier one.....

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