PCAOB warns about auditing commercial real estate

The Public Company Accounting Oversight Board released a report Monday from its staff highlighting special auditing considerations in the commercial real estate market, at a time when many office buildings have lost tenants due to remote work and empty space has grown.

The staff spotlight report discusses several considerations and examples for auditors related to commercial real estate as they plan and conduct audits and reviews of interim financial information in many industries with CRE exposure. The report includes a set of questions that auditors may consider when it comes to identifying and assessing risks, including the risk of fraud. It also provides reminders in areas such as asset impairment and allowance for credit losses, going concern, and interim review considerations.

"Economic downturns in certain industries, and changes in patterns of work, may have affected the use and valuation of commercial real estate," the report said. "Combined with higher interest rates, this has generated concerns among financial institutions and other companies in many industries with CRE exposure."

The spotlight points out that the Treasury Department's Financial Stability Oversight Council released an annual report in December discussed some of the vulnerabilities in the commercial real estate market, noting that hybrid and remote work arrangements in many industries from the COVID-19 pandemic reduced demand for office space, and many office property values have declined as a result. That may hold true as well for retail space in surrounding neighborhoods. Those factors are only compounded by higher interest rates and declining property values, which are increasing the initial financing and refinancing costs for borrowers. 

"When market vulnerabilities, including interest rate volatility, are present, a public company's industry and environment, including factors specific to the public company, may change quickly," warned the report. "As a result, knowledge obtained from past audits or interim reviews may no longer be as relevant. It is important for the auditor to understand how changes in the public company's industry, environment and activities may affect risks of material misstatement and whether those changes give rise to other risks."