Fair value measurement audit deficiencies attributable to mergers and acquisitions activity increased to 49% in 2013, up from 45% in 2012 and an average of 9% from 2008 to 2011. This is according to a new analysis of recent Public Company Accounting Oversight Board inspections from Atlanta-based consulting firm Acuitas. These results suggest that auditors are still having trouble keeping up with the increase in M&A activity in the wake of the financial crisis.
Big picture: Overall, the 2015 Survey of Fair Value Audit Deficiencies finds that 43% of all audits inspected by the PCAOB in 2013 had deficiencies (compared with 16% in 2009), with fair value measurement (FVM) and impairment deficiencies representing 31% of the deficiencies. The number of deficiencies caused solely by failures to assess risk and test internal controls remained high in 2013, at 45% of all deficiencies for the top 25 firms. In comparison, such failures were present in 22% of fair value measurement deficiencies between 2008 and 2012.
“We have seen a significant shift from the years where FVM deficiencies were largely the result of financial instruments to the current trend of business combinations and a failure to test or understand financial assumptions,” Mark Zyla, managing director of Acuitas, says in a news release. “This shift has likely been caused by audit improvements for financial instruments that resulted from the PCAOB inspection process and by increased merger activity in recent years,” he explained. “The auditing community should certainly be concerned about the continuing increase in deficiencies caused by a failure to assess risk and internal controls, and the PCAOB’s assessment that they are caused by ‘a lack of due professional care,’” says Zyla.
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