Stay informed with free updates
Simply sign up to the Accountancy myFT Digest — delivered directly to your inbox.
The number of US companies forced to withdraw financial statements because of accounting errors has surged to a nine-year high, raising questions about why mistakes are going unnoticed by auditors.
In the first 10 months of this year, 140 public companies told investors that previous financial statements were unreliable and had to reissue them with corrected figures, according to data from Ideagen Audit Analytics.
That is up from 122 in the same period last year and more than double the figure four years ago. So-called reissuance restatements cover the most serious accounting errors, either because of the size of the mistake or because an issue is of particular concern to investors.
A rise in restatements was “concerning”, said Sandy Peters, head of global advocacy at the CFA Institute, a professional body for investors. “Restatements tell you something about company management, and about a company’s internal controls.”
A number of high-profile companies have confessed to accounting mistakes in recent months. The retailer Macy’s said one of its accountants hid at least $132mn by deliberately mischaracterising delivery expenses. Archer Daniels Midland, the agricultural commodities merchant, ousted its chief financial officer after finding profits at its fast-growing nutrition business had been improperly inflated. Symbotic, a warehouse software group backed by SoftBank and Walmart, restated its historic financial results not once but twice last month.
EY was the auditor with the most clients forced to reissue their financial statements in the first 10 months of 2024, according to Ideagen. The firm accounted for 26 such cases, including at the fast food group Shake Shack, which admitted in February that it had not properly calculated two years of income tax expenses.
For the past two years, EY has also had the highest rate of deficiencies among the Big Four accounting firms in inspections by the industry’s regulator, the Public Company Accounting Oversight Board. The group declined to comment.
Ideagen’s figures exclude special purpose acquisition vehicles, which have had idiosyncratic accounting issues that forced hundreds to restate their accounts in recent years.
They also exclude less significant restatements, where companies are allowed to tweak previous-year figures in filings without having to go back and withdraw the earlier reports. Including these so-called revision restatements takes the tally this year so far to 304, up 7 per cent year on year to the highest level since 2020.
The Securities and Exchange Commission has been urging companies to withdraw and reissue erroneous financial reports when the mistakes are material, after criticism from investors that revision restatements were being used too often and amounted to “stealth restatements”.
More than half the reissuance restatements this year cover financial periods beginning in 2022 or earlier. PCAOB inspectors found a jump in deficiencies in its inspections of audit work after the pandemic, and the agency toughened sanctions for the worst breaches of audit standards.
Jeffrey Johanns, a former PwC partner who teaches auditing at the University of Texas, said the reasons for an uptick in restatements could include the complexity of new accounting standards, including how to account for expected credit losses, and companies’ increasing use of financial instruments not easily characterised as either equity or debt.
The rise of remote work in the post-Covid years could also be a culprit, he said. “Auditors need to sit across the table from the client, walk around the place, walk around the warehouse,” he said. “So much work being done remotely could lead to poorer audit quality.”
The PCAOB has argued that its tougher inspection regime since the pandemic will start to show results in future years.
“Our most recent inspections have seen significant improvement in the aggregate deficiency rates at the largest firms, which we expect to see reflected when the results are finalised next year,” it said.
Read the full article here
