When an error in a company’s financial statements is clearly immaterial to both the current and prior period, it may be addressed through an out-of-period adjustment, in which the error is corrected in the current period’s financial statements. This Audit Analytics blog says that out-of-period adjustments in 2021 declined by 17% over 2020, continuing a trend that began in 2016. This excerpt suggests that, when coupled with a decline in the percentage of companies that issued an adjustment, the trend says some good things about the quality of financial reporting:
The percentage of companies that issued an adjustment also fell to a new low. This percentage is evidence that the decline is not due to a shrinking population of public companies. The declining frequency of adjustments combined with the declining frequency of restatements, excluding 2021 SPAC restatements, suggests that the quality of financial reporting has been improving.
The one discordant note to this otherwise upbeat conclusion is the fact that 67% of last year’s out-of-period adjustments were negative, which means that prior period errors were twice as likely to overstate results as they were to understate them. However, the percentage of negative adjustments had crept up consistently over the past several years, reaching a peak of 80% in 2020 – which means that 2021’s results represent a significant improvement.
– John Jenkins