UPDATE 2-US company restatements zoomed 1997 to 2006--study

(Adds Chamber of Commerce comment in paragraphs 6-7, edits)

WASHINGTON, April 9 (Reuters) - The frequency of financial restatements by U.S. public companies began to increase before the Sarbanes-Oxley corporate reform law was passed in 2002, according to a study commissioned by the U.S. Treasury Department and released on Wednesday.

But the portion of restatements associated with fraud and revenue declined after 2001, said the report authored by Susan Scholz, a University of Kansas professor of accounting.

Restatements jumped to 1,577 in 2006 from 90 in 1997, although much of the increase came from small companies that are not traded on major stock exchanges, the report said.

Scholz found fraud was a factor in 29 percent of all 1997 restatements, but only in 2 percent of 2006 restatements.

The study, which analyzed 6,633 restatements, found that the average market reaction to restatement announcements was negative. Starting in 2001, however, the "magnitude" of market reaction declined.

A U.S. Chamber of Commerce official said there had been a dramatic increase in restatements "but the market views many of these in a ho-hum way."

"The conclusion that I draw from this is that we really need to take a look at the restatement policy in the United States. Restatements are very expensive for companies," said Michael Ryan, executive director for the chamber's Center for Capital Markets Competitiveness.

The Treasury Department did not ask the study's author to develop any policy recommendations.

Rather, the study is aimed at complementing work that a U.S. Securities and Exchange Commission advisory panel is doing to make financial reports easier to understand and prepare.

That 17-member panel, led by the chairman of MFS Investment Management, Robert Pozen, expects to issue recommendations by August.

David Nason, the Treasury's assistant secretary for financial institutions, said the Treasury Department has been in touch with the SEC, the Financial Accounting Standards Board and the SEC advisory panel, about the study.

In May, Treasury Secretary Henry Paulson unveiled a series of proposals to make U.S. capital markets more competitive.

His proposals, which included one to "modernize" financial regulations, and the request for the restatement study reflects concern that domestic capital markets have been growing faster abroad and that foreigners have trimmed back their pace of investment in the United States.

Other study findings include:

-- The proportion of restatements associated with revenue decreased to 11 percent in 2006 from 41 percent in 1997.

-- Restatements related to accounting for nonoperating expenses, nonrecurring events and reclassifications typically did not trigger negative market reactions. These represented about 24 percent of all 1997 restatements, increasing to nearly half at the end of the study period.

-- Companies that restated were typically unprofitable, even before the restatements. (Reporting by Rachelle Younglai; editing by Tim Dobbyn and Gerald E. McCormick)