The Public Company Accounting Oversight Board has released a report summarizing the types of problems its inspectors encountered at auditing firms in the wake of the economic crisis.
In the report, which covers the years 2007-2009, PCAOB inspectors identified instances where auditors apparently did not comply with PCAOB auditing standards in key areas 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. Those deficiencies occurred in audits of financial institutions and other types of companies.
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, said PCAOB acting chairman Daniel L. Goelzer in a statement.
For example, inspectors found some companies using external valuations of the fair value measurements of financial instruments, and their auditing firms failed to obtain a sufficient understanding of the methods used by the parties providing those valuations. Auditing firms also sometimes failed to sufficiently test the specific reserves on impaired loans.
The PCAOB acknowledged in the report that auditing firms have made some efforts to respond to the increased risks stemming from the economic crisis, but noted that firms need to continue to focus on making improvements to their quality control systems. The board plans to follow up on whether the changes in firms quality control systems have the desired effect.
The report will influence future PCAOB actions in connection with its inspection, enforcement, and standard-setting activities. The board will also consider whether additional guidance is needed related to its existing standards.
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