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February 3, 2023

CAQ-Commissioned Study Finds Reasonable Assurance Somewhat More Reasonable These Days

We're sharing the following with you not because we think it is a sign that both clients and their auditors have cleaned up their acts but it is a perfect example of how dangerous data can be in the wrong hands.

Let's take a look at the results of the work done by Susan Scholz, a University of Kansas accounting professor who performed this research at bequest of the Center for Audit Quality (so right there, you know where we are going with this):

"There are fewer instances of companies reporting inaccurate financial results," said Susan Scholz, a professor of accounting in the School of Business. "More importantly, not only are the absolute numbers of restatements dropping, the serious ones are going way down."

Hold up, I'm going to stop you right there. Fewer restatements does not mean inaccurate financial results are down, it simply means they haven't gotten caught or — worse — haven't noticed their statements are garbage.

Scholz looked at restatements filed with the SEC from 2003 – 2012 and discovered that restatements peaked from 2005 – 2006, with 1,600 in 2005 and 1,784 in 2006. In 2005 – 2006, more than half of those were in the "serious" category, while that number dropped to 35% in 2012.

Her theory on why restatements are down is — to put it kindly — hilarious:

"The number of restatements going down is the result of having cleaned things up and an increased focus on preventing new errors," she said. "Part of that is the additional work SOX requires to insure control systems are working well, and part is a renewed focus on getting things right."

This has likely made it more difficult for someone to commit a large-scale fraud like in the case of Enron or WorldCom, she said.

Another likely outcome of SOX has been auditors returning to more independent roots.

"This is a story about regulation, having a good effect, but it's also a story of a shock to the system that caused a cultural shift," Scholz said. "Auditors are there to make sure financials are correct, and they really returned to their roots. It was a reminder that being an auditor is a very important role in society, because having good, accurate information that people believe in and can act on is vital to a strong economy."

Auditors returning to more independent roots, eh? Was there some auditor Burning Man drum circle we missed?

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