Despite a slight decrease in 2014, audit deficiencies remain at a high level and relate to fair value measurements and impairment testing, according to a new analysis from forensic accounting firm Acuitas Inc.
Findings in the 2016 Survey of Fair Value Audit Deficiencies are based on Acuitas’ review of Public Company Accounting Oversight Board (PCAOB) inspection reports from 2009 to 2014 and information in the board’s inspection briefs.
The number of deficiencies for annually inspected audit firms decreased for the first time in five years – from 42.9 percent in 2013 to 39.2 percent in 2014, the report states. The PCAOB also observed this trend during its 2015 inspection cycle.
The PCAOB attributed the decline to the use of practice aids, checklists, coaching, monitoring, and support teams. The board has said that firms should use detailed and comprehensive analysis to determine the cause of deficiencies.
Despite that, Acuitas found that fair value measurements and impairment engagements comprise about a quarter of all audit deficiencies. The root cause of most fair value measurement audit deficiencies is the lack of risk assessment and testing of internal controls. The root cause of most impairment audit deficiencies is a failure to adequately test management private finance initiatives, the report states.
Deficient fair value measurements “are increasingly attributable to business combination engagements, particularly for triennially inspected firms,” the report states. In Acuitas’ survey of the top 25 audit firms, fair value measurement deficiencies related to business combinations rose from an average of 23.1 percent for 2009 through 2013 to 55.6 percent in 2014.
Here are a couple of other findings from Acuitas’ report:
- The PCAOB reorganized its inspection process into two programs: global network firms (the six-largest annually inspected US firms and about 145 of their affiliates that are mostly located outside of the United States) and nonaffiliate firms (four large annually inspected US firms and 445 domestic and foreign triennially inspected firms).
- PCAOB reports indicate that the board considers mergers and acquisitions to be an “economic risk that affects financial reporting risk,” the report states. Other risks include high-yield, hard-to-value securities and impairment risk due to recent fluctuations in oil and gas prices.