Adjustments Continue to Decline in 2021

Adjustments to financial statements – known as out-of-period adjustments – fell to a low of just 114 during 2021. This fall represents a 17% decline from 2020 and is part of a broader fall seen since 2016.

Out-of-period adjustments are a method of correcting immaterial errors in financial statements. Instead of reissuing previous financial statements or revising previous financial period information, a company will correct the error in the current period.

Financial Adjustment Trend

This trend is in stark contrast to the massive increase in financial restatements seen during 2021. However, excluding SPAC warrant and redeemable share errors, restatements declined by about 10% during 2021.

SPACs did not have a major impact on adjustments. Just 8% of adjustments related to SPAC warrants and none related to redeemable shares. Meanwhile, 42% of restatements related to SPAC warrants and 35% related to redeemable shares.

Financial Adjustment Frequency

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.

One area of concern is the overwhelming percentage of adjustments that had a negative impact on the financial statements. After several years of an increasing proportion of negative impacts, this trend reversed itself in 2021. About one-third of adjustments had a positive impact on the financial statements during 2021.

Despite the reversal of this trend, adjustments are still twice as likely to have a negative impact on financial statements. This means the initial errors are about twice as likely to overstate financial results.

For more information about financial reporting quality read our 2021 Financial Restatements: A Twenty-One-Year Review. Audit Analytics subscribers can download the report from their dashboard.

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