Driven Brands Restatement: What Auditors Looked For

Understand Driven Brands' Financial Restatement Due to Errors

On February 25, 2026, Driven Brands filed a Form 8-K under Item 4.02 disclosing that its previously issued financial statements should no longer be relied upon. The company's audit committee had concluded two days earlier that there were material errors in fiscal years 2023 and 2024. Those errors also reached every quarterly and year-to-date period within fiscal 2024, and the quarterly and year-to-date periods ended March 29, June 28 and September 27, 2025. ¹

The errors spanned lease accounting, cash reconciliations, expense classification and a set of other items the company groups together. The company completed the restatement in its Form 10-K for fiscal 2025, filed May 19, 2026. That filing cut previously reported net income by $54 million for 2023, $5 million for 2024 and $5 million through the third quarter of 2025. ²

The lease errors were a completeness failure: the company "identified certain leases that originated in prior periods beginning in 2023 where the lease had not been recorded at the time of lease commencement." Correcting them added $40 million to operating lease right-of-use assets and $40 million to operating lease liabilities at December 28, 2024. ²

It is a critical reminder for accounting teams and auditors alike. This case shows how much current accounting standards demand, especially Accounting Standards Codification (ASC) 842. It also shows why strong internal controls matter so much.

ASC 842 audit refers to independent auditors examining an entity's financial statements and the records behind them. The aim is to ensure the entity complies with the lease accounting standard. A need to restate, as seen with Driven Brands, points to significant deficiencies in financial reporting.

What are common accounting errors that lead to financial restatements? Auditors most often see improper revenue recognition, misclassified expenses, and inadequate impairment assessments. More and more, they also see errors in complex areas like lease accounting under ASC 842.

The audit implications are large. They range from closer scrutiny to potential penalties and damage to investor confidence. Companies must act on these challenges early to prevent similar outcomes. A crucial first step toward avoiding such issues is to understand ASC 842 audit adjustments.

What Auditors Look For After a Lease Restatement

Auditors approach a financial statement audit with a focus on management assertions. For lease accounting under ASC 842, the completeness assertion matters most. The completeness assertion refers to an auditor's goal of checking that the financial statements include all transactions and accounts that should be recorded.

When a company, like Driven Brands, discloses accounting errors that lead to a restatement, auditors at once question its internal controls over financial reporting. They ask whether those controls work, especially the ones meant to ensure completeness and accuracy.

Auditors perform extensive lease audit procedures to ensure compliance with ASC 842. This means more than reviewing existing lease schedules. It takes a deep dive into an entity’s contract files to find every contract that meets the definition of a lease.

One common audit finding can lead to restatements: the failure to identify every lease, including embedded leases. Grant Thornton puts it plainly: "it is important to look for the unknown, or embedded, leases that often were missed under ASC 840." This greatly affects the recognition of Right-of-Use (ROU) assets and lease liabilities on the balance sheet. ³

Auditors also closely check the initial measurement and later remeasurement calculations for these balances. They look for evidence of proper discount rates, lease terms, and component separation. For guidance on handling audit issues, it is essential to understand responding to ASC 842 audit findings.

⚠️ Risk Alert: A common audit finding involves companies that overlook service contracts with embedded leases. The result is an incomplete lease population and potential ASC 842 non-compliance. This often signals a breakdown in the initial lease identification audit processes.

Q: How do auditors test for accounting errors that lead to a restatement?

A: When a company, like Driven Brands, discloses accounting errors that require a restatement, auditors test by performing enhanced substantive procedures. They also re-evaluate internal controls. They review lease contracts, recalculate ROU assets and liabilities, trace cash transactions, and check expense classifications against accounting policies. Their focus widens greatly to assess how pervasive the control deficiencies are.

How Lease Errors Escalate Into a Restatement

The Driven Brands situation points to several critical risks and common failure points. These can lead to significant accounting errors and restatements. They arise most often in complex areas like lease accounting.

• Incomplete Lease Population Identification: Failing to identify all contracts that contain a lease is perhaps the biggest risk under ASC 842. This often includes overlooking embedded lease discovery. An embedded lease refers to a lease component inside a larger contract that may not be expressly identified as a lease. Without a thorough process to review all contracts, parts of the lease portfolio can be missed entirely. That review includes service agreements, shared-service arrangements, and supply contracts. The result is an understatement of ROU assets and lease liabilities.
• Improper Initial and Subsequent Measurement of ROU Assets and Lease Liabilities: Getting the discount rate, lease term, and lease payments right can be complex. Errors in these inputs directly affect the value of both the Right-of-use (ROU) asset and the corresponding lease liability. Under ASC 842, the ROU asset is defined as an asset that represents a lessee's right to use an underlying asset for the lease term. That wording is the ASC 842 Glossary's own, under "Right-of-Use Asset". Auditors test the ROU asset audit calculations and the assumptions behind them with rigor.
• Inadequate Internal Controls: Weak controls over data input, reconciliation processes, and periodic review of lease data greatly raise the risk of undetected errors. This was a direct factor in the Driven Brands situation, where ineffective internal controls were identified. This also affects areas like cash reconciliations and expense classifications.
• Lack of Expertise: Accounting for leases under ASC 842 takes expert knowledge. Misreading the standard can lead to incorrect financial reporting. This is particularly true around lease components, variable payments, and lease modifications.
• Untimely Adoption or Remediation: The problem gets worse when a company delays putting strong lease accounting systems or processes in place. It also gets worse when a company puts off fixing errors it has identified. The longer errors persist, the larger the restatement and the harder it is to untangle. This can lead to higher costs and more scrutiny.

Calculation Example: Impact of Undetected Embedded Lease

Scenario: A company has a 5-year service contract valued at $600,000 annually. It gives the customer the right to control the use of specified machinery for 60 months, so the company concludes the contract contains an embedded lease. The observable standalone price of the machinery use is $10,000 per month. The rate implicit in the lease is not readily determinable; the company's incremental borrowing rate is 5%.

The service component's observable standalone price is $40,000 per month. The two components' standalone prices therefore total $50,000 a month, against $50,000 of monthly consideration. The lease component's share of that consideration is $10,000 a month. ASC 842-10-15-33 requires a lessee to allocate the consideration to the lease and non-lease components on a relative standalone price basis, using observable standalone prices where they exist.

A lessee may instead elect, by class of underlying asset, not to separate the non-lease components from the lease component they relate to (ASC 842-10-15-37). The contract is then treated as a single lease component, and all $50,000 a month would be lease payments. The liability would be five times the figure below.

Key Takeaway: If the company failed to identify this embedded lease, it would understate both the ROU asset and lease liability by $529,907. That would greatly affect the balance sheet. This is where most teams get tripped up.

Practical Checklist for Lease Accounting Completeness

Lease completeness is critical to ASC 842 compliance. This checklist can help accounting teams find and address potential gaps early. It matters especially in light of situations like the Driven Brands restatement.

✅ Best Practice: Companies with strong execution hold quarterly lease reviews with cross-functional teams, including legal, procurement, and accounting departments. The reviews ensure all new and modified contracts are assessed for lease components. This proactive approach greatly reduces the risk of missed leases.

How to Check Your Own Lease Balances

Validation is key to preventing errors like those behind Driven Brands' restatement. Accounting teams must actively check that their lease accounting is accurate and complete. This means not just running processes but also testing them.

Driven Brands files with the SEC, so its control failures became public. A private company has no such filing obligation. That is why the internal validation below matters more, not less.

One of the first steps in validation is a roll-forward analysis of your lease population. Compare the current lease schedule to the prior period's audited schedule. Account for additions, terminations, and modifications. Look into any significant differences or unexplained omissions right away.

Teams should also set up a look-back procedure for new contracts. Select a sample of recent agreements that were first deemed not to contain a lease. Then re-evaluate them with fresh eyes. This helps to catch any early misreadings or oversights in lease identification audit processes.

ASC 842 asks for that assessment at inception. An entity determines at inception of a contract whether the contract is or contains a lease (ASC 842-10-15-2). It reassesses only if the terms and conditions of the contract change (ASC 842-10-15-6).

The ongoing work, then, is catching new and modified contracts as they arrive, and catching a contract the first assessment got wrong — not re-opening conclusions that were right. Lease term, purchase options and impairment carry their own reassessment triggers.

The definition is in ASC 842-10-15-3. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Documentation is key. Teams must clearly document every decision on lease versus service components, discount rates, lease terms, and modifications. Each one needs evidence to support it. Auditors will inspect this documentation at length.

Auditors typically expect to see lease abstracts, internal memos supporting the judgments — lease versus service, lease term, discount rate — and evidence that someone reviewed and approved each. For more context on the necessary audit process, refer to preparing for ASC 842 audits.

Q: What documentation do auditors require after a restatement?

A: For issues like those that led to Driven Brands' restatement, auditors will require full documentation. This includes all lease agreements, lease abstracts, and supporting calculations for ROU assets and lease liabilities under ASC 842-20-30-1. It also includes discount rate determinations under ASC 842-20-30-3, cash reconciliation workpapers, general ledger entries, and detailed narratives of internal controls over financial reporting. Evidence of management's review and approval at each stage is also critical.

The Errors Behind Restatements, and How to Avoid Them

The challenges Driven Brands faced highlight issues that keep coming up in complex accounting areas. Controllers and accounting managers must stay alert to avoid these common mistakes. They lead to misstatements and audit findings, especially those related to the Driven Brands restatement.

🚨 Critical: Failing to identify and properly account for all leases can result in material misstatement of financial statements. It can also lead to adverse audit opinions and to restatements that are costly and damage reputation. A crucial step for controllers is to perform an ASC 842 pre-audit self-assessment.

What Prevents a Lease-Driven Restatement

Strong lease accounting compliance execution does more than avoid restatements. It sets a company up for more efficient audits and reliable financial reporting. Some companies want to avoid issues like those that led to Driven Brands' financial restatement. For them, strong execution means a proactive, integrated lease accounting process.

It starts with a clear policy to identify, classify, and account for all leases. Senior management reviews and approves that policy. It includes guidelines for embedded lease discovery across all contract types.

Best-in-class companies use technology, such as specialized lease accounting software. It centralizes lease data, automates calculations, and produces compliant journal entries and disclosures. This keeps manual errors to a minimum and keeps the work consistent.

Regular internal reviews and reconciliations are another hallmark of strong execution. For instance, a well-prepared company might tie out its lease sub-ledger to the general ledger each month. It would look into any differences promptly.

It also reviews new contracts and existing leases at set intervals (e.g., quarterly) for modifications or impairments. That ensures the accounting reflects the current reality.

This robust approach helps find issues early and prevents surprises during external audits. Effective internal controls are written down, shared, and tested regularly for operating effectiveness. That ensures controls over lease accounting are robust.

This proactive stance leads to smoother audits and fewer audit findings. It also builds investor confidence and gives comfort that the financial statements are materially accurate.

Where to Go From Here on Restatement Risk

Controllers and accounting managers should put a thorough review of their internal controls and lease accounting processes first. The goal is to reduce the risks of accounting errors and potential restatements. It is critical to identify embedded leases early and to measure ROU assets and lease liabilities accurately. The Driven Brands experience is a powerful reminder of why vigilance and robust compliance frameworks matter.

Related Articles

• Audit implications related to management assertions
• Comprehensive guide to lease completeness testing procedures
• How ASC 842 impacts financial ratios and covenants
• Avoiding common ASC 842 pitfalls