Problems with revenue, related-party transactions and outside auditors were among the deficiencies found among auditing firms, according to a recent report.
The Center for Audit Quality presented a webcast explaining the deficiencies the Public Company Accounting Oversight Board identified in its report summarizing the findings of its triennial inspections of smaller auditing firms.
One problem comes with the use of specialists and independence. "You cannot prepare the financial statements with the footnotes," said Mark West, regional associate director of inspections at the PCAOB. "You're auditing your own work, which is forbidden."
Related-party transactions should raise red flags. "The transactions have to make sense," said Joan Waggoner, CPA and a partner in charge of quality assurance at Blackman Kallick. "The question should come up, why is the loan structured this way, or why did they get a loan when they're on the verge of bankruptcy? It doesn't hurt to get familiar with the names of all the key players at the client."
Equity transactions can be perplexing as well, especially for small emerging companies. "We have issuers that have more equity transactions than sales transactions," said Kurtis Wolff, principal in charge of audit and assurance at Reznick Group. "We've got puts, we've got options, convertible debts, embedded derivatives. It can be very complex and difficult to understand. You may need to attach a technical expert to make sure this gets caught and identified at the end of the day."
Cindy Fornelli, executive director of the Center for Audit Quality, asked if the PCAOB has found any improvement in audits in its most recent inspections. The participants agreed it had. "Having that regulator looking over your shoulder gives you the extra energy you need," said Waggoner.