Block Journal (among various other sources) recently published the following:

• 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.
• …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.”

We looked at the Macy’s instance here, and subsequent reporting seems to confirm that it’s something of a peculiarity. As reported by NBC News: “The (responsible) employee told investigators that a mistake was initially made in accounting for small parcel delivery expenses, and then the person made intentional errors to hide the mistake, according to sources familiar with the investigation.” Given that the impact seems to have been barely material from most perspectives, if at all, Macy’s main problem may seem to have been sheer bad luck. That aside, Johanns’s explanations may have some validity, particularly the point about remote work, which goes to a broader issue regarding audit culture. It’s no surprise that the article frames all this as a problem, citing the Public Company Accounting Oversight Board as arguing that “its tougher inspection regime since the pandemic will start to show results in future years.” But any such tightening of the inspection regime also threatens to compound the profession’s recruitment and retention challenges, thereby putting even greater pressure on long-term audit quality.

My own view, as I’ve expressed before, is that a certain number (still a low one in the scheme of things) of restatements would be better viewed as a feature of auditing rather than a bug, as they say. There’s no line of knowledge work in which mistakes don’t get made (even the best doctors have the occasional failed operation; even the best lawyers occasionally misjudge a case or a strategy etc. etc.) so I’m puzzled at the audit profession’s almost unique propensity for constantly beating itself up. That’s not to say such failures should be merely shrugged off of course, each one is its own kind of learning experience, but after a while, repeatedly upgrading the “toughness” of the oversight regime comes to seem like a kind of wanton masochism.

Whether or not Johanns’s point about remote work specifically explains any of the recent restatements, it seems broadly true that remote work isn’t well-aligned with the gathering of the kind of know-how that comes from close observation, from extended digressive conversation with eye contact and real human presence, from being drawn into things one would otherwise miss. We recently cited SEC Chief Accountant Paul Munter’s comments that “behavior is driven the most by the people that are directly around you, which some refer to as the ‘mood in the middle’ or the ‘buzz at the bottom’.” But it’s hard to be positively influenced and shaped when you’re mostly sitting at home, picking up whatever scraps of mood and buzz happen to traverse across the distance. Not least among the profession’s many current challenges is that of reconciling the value of presence and immediacy with the practical problem of a young workforce accustomed to viewing the world largely through its screens…

The opinions expressed are solely those of the author.