Explosion of earnings restatements is due to...

the fact that companies weren't spending enough on internal and external auditing pre-Sarbanes-Oxley. CFO.com says "An explosion in accounting errors — in part reflecting the difficulties of today's complex rules — has forced nearly a quarter of U.S. companies to learn the art of the restatement."

Later in the CFO.com story, the author states "Reports showing the prevalence of errors due to equity accounting, followed by expense recognition, general "misclassification," acquisitions and investments, revenue recognition, and tax accounting, confirm for (Glass Lewis managing director Jonathan) Weil that companies weren't spending enough on internal and external auditing pre-Sarbanes-Oxley. That, as much as harsh rule-making, was at the root of many restatements. "Find me one major institutional investor who has ever complained about auditor fees," he says. "Glass Lewis doesn't like excessive costly duplicative regulation either. But the stronger regulation you have of internal controls, the lower the cost of capital should be for companies."

Well, the problem with that is CEO's generally want to spend as little as possible on the accounting function. They want quick and dirty ERP financial implementations, and don't want to hire enough staff to properly implement financial systems and then maintain those systems. At budget time, the accounting department is generally at the bottom of the priority list. The linked article quotes a Grant Thornton principal who agrees:

"Companies are in business to produce their product and sell it at a profit, and the reporting of the processes around that is a secondary goal," he says. "In some cases, it's become too secondary."

Further, the article states that "Generally, companies have tried to keep auditing fees at a minimum. Glass Lewis managing director Jonathan Weil, the editor of the San Francisco–based firm's financial research, suggests that restatements often stem from companies having spent at "ridiculously low levels" for their pre-Sarbanes-Oxley auditing."

Massive accounting fraud at Computer Associates...FACT

The point: this type of fraud doesn't occur without approval at the highest levels of a company. The story is at Yahoo News; here are a couple of excerpts.

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"Sanjay Kumar, the former chief executive of CA Inc. (NYSE:CA - news), pleaded guilty on Monday to securities fraud, perjury and obstruction of justice charges related to his role a $2.2 billion accounting scheme at the computer software company."

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"Kumar, who left Computer Associates International Inc., as it was known, in June 2004, improperly booked software license revenue from 1999 to 2000 in order to meet Wall Street analysts' quarterly earnings expectations and then lied to investigators about it, according to the indictment.

In one instance, prosecutors charged that Kumar paid off a customer who threatened to tell the government about a bogus software deal. The payoff of $3.7 million was made while Kumar knew an investigation was pending against the company."

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"As part of the scheme, Kumar and other sales executives back-dated software license contracts so that revenue would be recorded in a quarter where extra sales were needed to help the Islandia, New York, based company to meet or exceed Wall Street estimates, the indictment said.

In one instance, Kumar flew in the company jet to Paris where he personally negotiated a license agreement for $32 million. That contract was backdated to make it appears that it had been finalized and signed on June 30, 1999, the government said."