The Public Company Accounting Oversight Board (PCAOB) recently released a report summarizing inspection observations of audits of financial institutions and other companies during the economic crisis.
The PCAOB is issuing this reportto inform the public about the audit risks and challenges that it has identified through its inspection program as a result of the disruption in credit and financial markets and the broader economic downturn.
"This report provides illustrative examples of the kinds of issues our inspection program has uncovered during the past three years as a result of the impact of the economic crisis on the work of auditors", said PCAOB Acting Chairman Daniel L. Goelzer. "These inspection observations underscore the need for auditors to be diligent in assessing and responding to emerging areas of risk when economic and business conditions change."
The key points discussed in the report include:
- PCAOB inspectors identified instances where auditors appeared not to have complied with PCAOB auditing standards in connection with audit areas that were significantly affected by the economic crisis, such as fair value measurements, impairment of goodwill, indefinite-lived intangible assets, and other long-lived assets, allowance for loan losses, off-balance-sheet structures, revenue recognition, inventory, and income taxes.
- Firms have made efforts to respond to the increased risks stemming from the economic crisis. The deficiencies identified by inspectors in their reviews of issuer audits suggest that firms should continue to focus on making improvements to their quality control systems.
- The PCAOB will focus on whether firms’ actions to address quality control deficiencies described in board inspection reports have, in fact, reduced or eliminated subsequent occurrences of the kinds of deficiencies described in this report.
- The observations described in this report will serve to inform future PCAOB actions in connection with certain inspection, enforcement, and standard-setting activities. The PCAOB will consider whether additional guidance is needed related to existing standards.
- PCAOB inspectors will continue to focus on firms' audits and quality control systems, particularly as they relate to audit risks posed by the ongoing effects of the economic crisis and any future similar events.
"PCAOB inspectors will continue to adapt to emerging issues. Inspectors also will focus on whether firms are addressing the quality control deficiencies described in board inspection reports", said George Diacont, director of the Division of Registration and Inspections.
The report is based on PCAOB inspections that examined portions of audits of financial institutions, financial services companies, and other companies that posed audit risks and challenges specific to the disruption in the credit and financial markets and the broader economic downturn.
The report covers aspects of PCAOB inspections conducted during the 2007 through 2009 inspection cycles, which generally involved reviews of audits of issuers' fiscal years ending in 2006 through 2008. The majority of the inspection observations discussed in this report were identified by inspectors during the 2009 inspection cycle and included in 2009 inspection reports, which were issued by the PCAOB in 2010.