This week’s news reminded us yet again how simple mistakes can often reveal significant risks. Lyft, the global ridesharing company, routinely released its quarterly earnings report on February 13 that should have signaled good news about the company’s future profitability. Unfortunately, thanks to typo, the good news looked even more spectacular and the company’s stock soared. As the Wall Street Journal reported:
Lyft’s release Tuesday said one of its profit margins was expected to expand by 500 basis points—or 5 percentage points—in 2024. That margin was only expected to expand by 50 basis points, the company’s chief financial officer later clarified on a call with analysts….The company’s stock soared over 60% when the release came out after the close of regular trading Tuesday. Many stock trades are done by computers, reacting in fractions of seconds to new information. The inflated margin likely triggered a buying frenzy before most people could digest the numbers.
As soon as it recognized the mistake, the company acknowledged the error, and the stock price receded to a still healthy 30% increase over Tuesday’s close. Lyft’s CEO has been very transparent in conversations about the mistake. As CNN reported:
“Look, it was a bad error, and that’s on me,” Lyft CEO David Risher told CNBC on Wednesday. He also added that the extra zero got through even though it had “thousands of eyes” on it.
Lyft is certainly not the first company whose simple mistake moved markets, and it likely won’t be the last. Given the scrutiny associated with financial disclosures from publicly traded companies, disclosure controls have always been important. They took on a heightened level of significance following passage of the U.S. Sarbanes-Oxley Act more than 20 years ago.
Lyft’s swift response to the error and the candor of its CEO have been commendable. It’s also clear that the CEO wants to find out how the mistake was made, and how to prevent such mistakes in the future. An obvious choice for such an objective analysis is to call in the company’s internal auditors, and that is exactly what the CEO plans to do. As Business Insider Reported:
The CEO said that an internal audit team will look at the mistake and figure out how to prevent it from happening again.
As a former Federal Inspector General, I frequently found myself undertaking what I called “who shot John” audits. These were reviews following highly publicized mistakes where the “condition” (and maybe even the “impact”) was already known. Our mission was to quickly ascertain the “cause” and to formulate “recommendations” to prevent such mistakes in the future. These engagements were not the most valuable service we performed, but were important, nonetheless. Nothing less than the government agency’s credibility was often on the line.
Chief audit executives should remind executives and their boards that much like “Ghostbusters,” internal audit should be on their speed dial when mistakes such as the one at Lyft are discovered.
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