“Our firm recently performed a study of inspection reports by the PCAOB,” says Mark Zyla (Acuitas), referring to the Private Company Accounting Oversight Board. The new study, Survey of Fair Value Audit Deficiencies, found that the most common reason for the “dramatic increase” in audit deficiencies relates to fair value measurements (FVM), either in the audit of the measurement or the testing for impairment, particularly of financial instruments. According to the study’s executive summary:
The increase in audit deficiencies related to FVM and impairment are consistent with a general increase in all audit deficiencies, and is a likely result of uncertainty created by the economic downturn. FVM and impairment audit deficiencies are particularly significant because these two particular issues account for over half of all recent audit deficiencies. Auditing the estimates and assumptions underlying FVM and impairments requires heightened professional skepticism as these judgmental areas are susceptible to management bias, particularly in difficult economic times.
The study found 123 audit deficiencies related to fair value estimates and asset impairments in 2010 PCAOB inspection reports, compared to 72 deficiencies in 2009, says an online writer for the Wall Street Journal. “The PCAOB is saying that the auditors in certain situations didn’t provide enough scrutiny in terms of management’s forecasts,” Zyla told the WSJ, “or [they] didn’t look closely enough at the assumptions and methodologies that went into some of the modeling used by corporate pricing services.”
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