If an error (either accidental or intentional in nature) is subsequently discovered that affected a prior period, the nature of the error, its effect on previously issued financial statements, and the effect of its adjustment on current period’s net income and EPS should be disclosed in the period in which the error is adjusted. In addition, any comparative financial statements provided must be adjusted.
An example of the disclosure provided when an error adjustment is made through a prior-period adjustment is given in Exhibit 6; the error adjustment (intentional errors in this instance) was made in 2000 by Xerox. Xerox provides extensive disclosure as to the effect of the errors on the income statement and the balance sheet for each year affected. As you read over the business like a description of the accounting errors uncovered at Xerox, keep in mind that underlying these long-fold disclosures are the destroyed careers of many accountants and managers at Xerox who stepped over the earnings management line into the area of earnings misstatement. Between the lines of this note, one can also sense the lost trust of Xerox shareholders, customers, suppliers, and regulators.