Typos and Turmoil: Lyft’s Fourth Quarter Earnings Release Oops

The importance of robust internal controls

During February, Lyft’s CEO, Davd Risher, found himself in a frenzy of anticipation followed by a haze of confusion. A significant error in the company’s fourth-quarter earnings release sent shockwaves through the financial world. The error snuck its way into the release, boldly proclaiming that Lyft would see a 500-basis point (5%) margin expansion in 2024. Investors eagerly awaited their chance to ride the soaring stock value, which surged over 60% in response to this proclamation. Yet, when the earnings call commenced, the CFO emerged as the bearer of sobering news. The margin expansion was a mirage, a mere 50 basis points (0.5%) awaited, a small fraction of the initially proclaimed expansion. Mr. Risher took ownership of the error. In disbelief, he recounted, “We had thousands of eyes, we’ve got a process on this that is nuts. It’s a terrible thing. It is an extra zero that slipped into a press release.”

Segregation of duties

This provides an opportunity to discuss internal controls and their proper implementation. One critical measure that comes to mind is the segregation of duties within the finance and communications teams. Picture this, as the finance team meticulously verifies the figures provided to the communications team who drafts the earnings release. Here is where the magic happens – a system of checks and balances kicks into gear. Each team member dons their detective hat and scrutinizes the work of their counterparts. Much like the way partners in a tango class coordinate steps under the guidance of a dance instructor, the teams operate in tandem, under the watchful eye of senior management. By divvying up distinct responsibilities to different individuals and ensuring multiple eyeballs are involved in the preparation and review of financially significant documents, statements, and press releases, companies like Lyft can reduce the risk of decimal errors slipping through the cracks and ensure when their earnings hit the spotlight they shine with accuracy and transparency.

As part of this segregation, encouraging cross-functional collaboration between relevant departments, such as finance, communications, and legal, further strengthens internal controls. Each department complements the other. Collaboration ensures that all departments are aligned in their understanding and facilitates the exchange of information necessary for accurate reporting.

Establishing documented review procedures

Another essential internal control measure is the establishment of documented review procedures. A key melody in the rhythm of corporate governance, these procedures outline the specific responsibilities of each reviewer and specify the criteria for identifying errors. Imagine a symphony where each musician follows meticulously scripted notes. In the world of finance, these documented review procedures serve as sheet music, outlining the responsibilities of each player and setting the tempo for the review process. By documenting an organization’s review procedures, employees have clear guidelines, allowing them to move in synchrony.

Management oversight

Strong management oversight takes center stage as the conductor, guiding the organization towards flawless performances. Oversight is crucial in preventing mistakes, inadvertent or intentional. Senior executives should regularly review financially significant documentation to ensure accuracy and consistency.

Employee training

Providing employees with ongoing training and education promotes a culture of attention to detail. Corporate training is like a rehearsal session, refining each employees’ skills to perfection. Continuous education reinforces the importance of accuracy and fosters a sense of responsibility among employees.

IT controls

One cannot talk about internal controls without considering IT controls such as the principle of least privilege. Its role is simple yet profound, restricting employee access within the financial reporting system to only that which is necessary for their specific tasks. Least privilege ensures that each team member plays their part without overstepping boundaries.

By incorporating and enforcing more robust, intentional internal controls, Lyft and other companies can minimize the risk of errors in financial statements and accompanying earnings releases, safeguarding their credibility and orchestrating stakeholder trust.

Concerned your business may have internal control gaps? If so, consider an independent review of processes and controls. Keiter’s Risk Advisory Services team can provide your management team with valuable insights on opportunities for enhancing internal controls and thereby reduce risks. Contact your Keiter Opportunity Advisor | Email | Call: 804.747.0000