The Public Company Accounting Oversight Board found problems with four audits conducted by Ernst & Young in its latest inspection report.

With one client, an unidentified company that originates, acquires and sells mortgage loans, the PCAOB noted that during the year under audit, the company had repurchased 600 percent more whole pool mortgage loans than in the previous year. But the PCAOB said Ernst & Young failed to perform substantive procedures to test whether the repurchases of whole pool mortgage loans had been made in accordance with the terms of the related mortgage loan sales agreements, in order to determine whether the accounting treatment was appropriate.

The same company provided financing to certain non-affiliated entities that used the financing to originate mortgage loans. In certain cases, the company then repurchased the same mortgage loans. The PCAOB said there was no evidence in the audit documentation or elsewhere that Ernst & Young had evaluated whether these non-affiliated entities were variable interest entities that needed to be consolidated.

With the second client, the company recorded a reserve for guarantees related to known lease defaults by certain licensees, but E&Y failed to perform procedures to evaluate whether the company should have recorded a reserve for the remaining population of guarantees to comply with FIN 45.

With a third client, Ernst & Young failed to perform appropriate substantive tests of certain software development costs that the issuer had capitalized in the year under audit. A fourth client exchanged an interest in one joint venture for an interest in another joint venture and cash. As a result of the exchange transaction, the company recorded a significant gain in excess of 250 percent of the amount of cash the issuer had received.

E&Y accepted the company's assertion that the negotiated values represented the fair values of the joint ventures. The company also hired a specialist, and the specialist's valuation supported the amount recorded by the company. While E&Y performed certain procedures with respect to the work of the specialist, the firm failed to test the data that the issuer had provided to the specialist, noted the PCAOB.

In its response to the report, E&Y wrote, "Although we do not always agree with the characterization in the report of the work we performed or the related audit documentation, in some instances we did agree to perform certain additional procedures or improve aspects of our audit documentation in response to the inspection. In no instance did these actions change our original audit conclusions or affect our reports on the issuers' financial statements."

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