July 31, 2013
acuitas, inc.’s survey of fair value audit deficiencies
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acuitas, inc.
Executive Summary
Public Company Accounting Oversight Board (PCAOB) inspection reports provide insight into recent audit
quality trends. While the number of audits with deficiencies increased from 2010 to 2011, the number of fair
value measurement (FVM) audit deficiencies as a percentage of the total decreased. The decrease in FVM audit
deficiencies is likely the result of audit firms’ responses to PCAOB inspection reports, auditors having more
experience dealing with FMV audit issues and an improvement in economic conditions. While the trend in
FVM deficiencies is declining for the top 25 accounting firms, the incidence is still high. Of the 58 available
inspection reports from 2008 to 2011, 33 or 57% had FVM and / or impairment audit deficiencies. Acuitas,
Inc.’s Survey of Fair Value Audit Deficiencies is intended to assist financial statement preparers,
auditors, and valuation specialists in understanding the underlying causes of FVM and impairment audit
deficiencies, as reported by the PCAOB in their latest inspection reports. The information contained in the
study should benefit public entities and their auditors, and by extension, private entities and their auditors.
In year over year comparisons of firms subject to annual inspection, PCAOB inspections indicate two significant
trends. 1) The percentage of audits with deficiencies more than doubled between 2009 and 2010 from 14.8%
to 32.6%, and climbed again in 2011 to 37.5%. 2) FVM and impairment audit deficiencies continue to be a
significant contributor to audit deficiencies and account for over 30% of total audit deficiencies, even though
the incidence of these deficiencies declined a bit from the peak in 2010.
The survey also examines the underlying causes of FVM and impairment audit deficiencies. Recent PCAOB
reports indicate that most FVM related audit deficiencies (33.8%) resulted from failures to perform sufficient
procedures to test FVM, particularly the FVM of financial instruments. This finding reflects a shift from last
year’s conclusion that most FVM audit deficiencies were caused by inadequate testing of asset prices provided
by outside pricing services. However, inadequate testing of prices still accounts for a significant portion of audit
deficiencies, making up 26.2% of this year’s FVM deficiencies. As in previous years, most impairment related
audit deficiencies (55.6%) were related to the testing of managements’ prospective financial information.
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.
FVM Audit Deficiencies Improve
Audit deficiencies attributable to fair value measurements (FVM) and impairment audit procedures while
still significant have declined recently, which is apparent from the latest inspection reports issued by the
Public Company Accounting Oversight Board (PCAOB). FVM and impairment audit deficiencies accounted for
approximately half of all audit deficiencies in 2010, but only 30.9% in 2011.
The purpose of the survey of PCAOB inspection reports is to help financial statement preparers, auditors,
and valuation specialists understand the ultimate causes of FVM and impairment audit deficiencies and
failures, according to the PCAOB. The purpose is also to highlight trends in the PCAOB inspection findings,
in aggregate. The information contained in the study should be of benefit not only to public entities and their
auditors, but by extension, to private entities and their auditors. The survey begins with a brief overview
of the PCAOB inspection process and the survey methodology. The next section examines trends in audit
deficiencies by looking at statistics over a four year period. Finally, the survey provides information about the
specific causes of FVM and impairment audit deficiency.
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.
PCAOB Inspections
The PCAOB conducts inspections of registered public accounting firms as required by the Sarbanes-Oxley
Act of 2002. The inspections are designed to identify and address deficiencies in a firm’s audit engagements
and to determine whether deficiencies indicate a weakness or defect in the firm’s system of quality control
over audits. The annual inspection process encompasses a review of selected audits and a review of the firm’s
system for quality control.
PCAOB reviews of selected audits are intended to identify financial statement misstatements, including failures
to comply with disclosure requirements and failures to perform applicable audit procedures. When a deficiency
reaches a level of significance that appears to indicate the firm failed to obtain sufficient audit evidence to
support its audit opinion on the financial statements or on the effectiveness of internal control over financial
reporting, the deficiency is described in the PCAOB’s inspection report, which is publicly available.
The PCAOB performs annual inspections of firms that regularly provide audit reports for more than 100
issuers. The largest international auditing firms, Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and
PricewaterhouseCoopers LLP (“the Big Four”) are among the firms inspected annually. The PCAOB conducts
inspections triennially (once every three years) of smaller auditing firms that audit public registrants. While the
PCAOB inspection reports are silent about the financial statement dates of the audit engagements examined,
the PCAOB’s field work generally begins just after the audit season in February or March, and extends through
October or November. Therefore, it appears likely that 2011 inspection reports relate to audits of 2010 financial
statements.
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.
Methodology
The Survey of Fair Value Audit Deficiencies from PCAOB Inspection Reports was prepared using a three-fold
approach. First, we examined the PCAOB’s inspection reports for firms subject to annual inspection. In order
to analyze trends in audit deficiencies, we focused on the seven firms with inspection reports available each
year from 2008 through 2011. The seven firms include Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP,
PricewaterhouseCoopers LLP, McGladrey LLP, Grant Thornton LLP, and BDO USA LLP. The PCAOB performed
field work at each of these seven firms’ national offices and in 168 (38.9%) of the firms’ practice offices, and
reviewed aspects of 293 audits and 6 other engagements. Our findings appear in the section entitled Audit
Deficiency Trends.
The purpose of the second part of our survey is to analyze the types of engagements that give rise to FVM
and impairment deficiencies and to examine the causes of these deficiencies. The second part of the survey
covers all of the PCAOB inspection reports available for the top 25 public accounting firms1 for 2008 through
2011, including those subject to annual inspection and those subject to inspection every three years. Of the
58 available inspection reports, 33 (57%) had FVM and impairment audit deficiencies. In addition to the seven
firms mentioned above, audit deficiencies were cited in the inspection reports for Crowe Horwath LLP, BKD
LLP, Moss Adams LLP, Plante Moran PLLC and Marcum LLP. The PCAOB provides a brief description of the
type of audit failure and the underlying cause. For each report, the PCAOB generally presents each deficiency
as a separate bullet point. In the survey, each deficiency was counted and categorized based on the type
of audit failure. FVM deficiencies were categorized into financial instruments, pension plans and business
combinations, and impairment deficiencies were categorized into those attributable to goodwill, asset groups
and intangible assets. The underlying causes were tallied and audit deficiency statistics were calculated.
Finally, we reviewed the PCAOB’s own report on inspections of smaller firms that issue fewer than 100 audit
reports each year and that are subject to inspections triennially. A brief recap of the PCAOB’s overall findings
and specific FVM and impairment observations is provided on page 11 of this report.
Description of a Deficiency
The individual PCAOB inspection reports themselves do not define deficiency. However, Auditing Standard
No. 7 Engagement Quality Review provides a description saying that a significant audit engagement deficiency
“exists when (1) the engagement team failed to obtain sufficient appropriate evidence in accordance with the
standards of the PCAOB, (2) the engagement team reached an inappropriate overall conclusion on the subject
matter of the engagement, (3) the engagement report is not appropriate in the circumstances, or (4) the firm is
not independent of its client.”2
The 2012 accounting TODAY Top 100 Firms, www.digital.accountingtoday.com.
PCAOB Auditing Standard No. 7 Engagement Quality Review
1
2
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.
Audit Deficiency Trends
The PCAOB inspections for the seven firms with reports available in 2008 through 2011 indicate several
trends. First, the percentage of audit engagements with deficiencies has increased dramatically since 20093.
Currently over one in three audits examined is significantly deficient. In connection with the seven 2011
annual inspections, the PCAOB found deficiencies in 112 issuers, or 37.5% of audits and other engagements
examined. In 2009, the inspection reports for the same seven firms cited deficiencies in 53 issuers, or 14.8%
of audits examined.
The average number of deficiencies cited per deficient issuer has also increased from 1.6 in 2008, to 2.5 in
2011; however, a portion of this increase can be attributed to the PCAOB providing more robust information
about deficiencies in recent reports.
PCAOB
Inspection
2009
PCAOB
InspectionReports
Reports
20092009
PCAOB
Inspection
Reports
32.6%
32.6%
67.4%
67.4%
85.2%
85.2%
Engagements with Deficiencies
Engagements without Deficiencies
Engagements with Deficiencies
Engagements without Deficiencies
2011
PCAOB Inspection
Reports
2011
PCAOB
Inspection
Reports
2010 PCAOB Inspection Reports
2011
2011FVM
FVMDeficiency
DeficiencyCauses
Causes
2008
2008toto2010
2010FVM
FVMDeficiency
DeficiencyCauses
Causes
4.6%
4.6%
32.6%
37.5%
67.4%
21.5%
21.5%
13.8%
13.8%
26.2%
26.2%
62.5%
33.8%
33.8%
2008 to 2010 FVM Deficiency Causes
3
5
The percentage
of audit engagements with deficiencies is not available for 2008.
6.5%
2.2%
14.0%
acuitas, inc.’s survey of fair value audit deficiencies 46.8%
1
6.5%
6.5%
2.2%
2.2%
14.0%
14.0%
9.1%
9.1%
Engagements with Deficiencies
Engagements without Deficiencies
iency Causes
26.2%
201
20
14.8%
14.8%
n Reports
2010
PCAOB
InspectionReports
Reports
2010
PCAOB
Inspection
2010
PCAOB
Inspection
Reports
46.8%
46.8%
21.5%
21.5%
2011 Impairment Deficiencies
7.4%
©2013 acuita’s inc.
4.6%
21.5%
13.8%
2.2%
26.2%
6.5%
14.0%
9.1%
33.8%
46.8%
21.5%
A second trend indicates that FVM and impairment deficiencies have declined for the seven firms since
their peak in 2010. In 2010, there were 115 FVM and 40 impairment deficiencies, representing 49.7% of
all deficiencies and in 2011 there were 62 FVM and 26 impairment deficiencies, representing 30.9% of
total deficiencies.
Deficiency Trends
FVM Deficiencies
Impairment Deficiencies
Other Deficiencies
The economic crisis was likely the primary cause of the increase in FVM and impairment audit deficiencies in
2010. Economic volatility affected entities income from underlying operations and caused other changes in fair
value, which introduced additional risk and uncertainty to the audit process. Hard-to-value financial instruments
like asset backed securities, collateralized debt obligations, and other collateralized mortgage obligations were
at the heart of the financial crisis and pricing information was not readily available. In addition, the number
of companies experiencing goodwill and long-lived asset impairment triggering events also increased during
the economic crisis. Impairment testing relies on projected financial information (PFI) which becomes more
difficult to assess in uncertain times. The value of goodwill impairments for U.S. companies peaked in 2008
at $188 billion, and then dropped off dramatically to $26 billion in 20094. Impairment deficiencies were cited
less frequently in 2011 inspection reports relative to other deficiencies, which is likely due to the drop off of
goodwill impairment write offs in 2009 and 2010.
4
Duff & Phelps 2011 Goodwill Impairment Study, September 27, 2011, p.9.
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.
FVM Deficiencies
In all four years, FVM deficiencies were primarily attributable to financial instruments; however the percentage
increased from 86.6% in prior years to 89.2% in 2011. Deficiencies relating to pension plan audits accounted
for 8.1% of FVM deficiencies in 2008 through 2010 and 1.5% in 2011. Business combinations were the
source of 5.4% of FVM deficiencies in prior years, and increased to 9.2% in 2011.
Reports
2008FVM
to 2010
FVM Deficiencies
2008 to 2010
Deficiencies
2011 FVM2011
Deficiencies
FVM Deficiencies
2011 FVM Deficiencies
1.5%
2008 to 2010 FVM Deficiencies
9.2%
9.2%
1.5%
8.1%
5.4%
5.4%
8.1%
5%
89.2%
89.2%
86.6%
2009 PCAOB Inspection
2009 PCAOB
Reports
Inspection Reports
Financial Instruments
86.6%
2010 PCAOB Inspection
2010 PCAOB
Reports
Inspection Reports
Business Combinations
Financial Instruments
Pension Plans
Plans
14.8% Pension 14.8%
32.6%
2011 PCAOB Inspection
2011 PCAOB
Repor
Ins
Business Combinations
32.6%
37.5%
to adequately test FVM was the primary
cause of audit
deficiencies in the current PCAOB reports62.5%
while
67.4%
67.4%
85.2% Failures
85.2%
2011 Impairment
2011 Impairment
Deficiencies
Deficiencies
2008 to cause
2010
2008Impairment
2010audit
Impairment
Deficiencies
Deficiencies
pricing issues were the primary
oftoFVM
deficiencies
in the previous three year period examined.
7.4%
40.7%
7.4%
40.7%
51.9%
62.5%
Disclosure and risk assessment deficiencies were higher in 2011 than in previous years. Prospective financial
9.6%
9.6%
information deficiencies relate to forecasts used to measure the fair value of intangible assets in business
combinations. The increase in PFI deficiencies in 2011 mirrors an increase in the number of business
combination deficiencies in 2011. More specific descriptions of these FVM audit deficiencies taken from the
51.9%PCAOB inspection reports are provided
32.9% in 32.9%
57.5% section.
57.5%
the following
2011
FVM
Deficiency
Causes
2011 FVM Deficiency
Causes
2011
FVM
Deficiency
4.6%
Causes
2008
to 2010
FVM
Causes
2008Deficiency
to 2010
FVM
Deficiency
Causes
2008
to 2010
FVM
Deficiency
Causes
4.6%
Pricing
21.5%
13.8%
26.2%
21.5%
13.8%
33.8%
26.2%
33.8%
2.2%
6.5%
2.2%
6.5%
Pricing
Failure to Test
Disclosures
Risk Assessment/
Controls
PFI Assumptions
14.0%
9.1%
21.5%
Failure to Test
14.0%
Disclosures
46.8%
Risk Assessment/
46.8%
9.1%
Controls
21.5%
PFI Assumptions
OTTI Classification
7
2011 Impairment
2011 Impairment
DeficiencyDeficiency
Causes Causes
acuitas, inc.’s survey of fair value audit deficiencies 2008-2010
2008-2010
Impairment
Impairment
DeficiencyDe
8.2%
8.2%
©2013 acuita’s inc.
Description Of Fair Value Measurement Deficiencies
Pricing – Includes failure to understand the methods, models and assumptions used by pricing services
or valuation specialists; using the same pricing service to corroborate prices that the issuer used when
measuring fair value; failure to investigate significant differences between prices from different sources; failure
to investigate pricing differences identified by internal audit; failure to investigate adjustments made to third
party prices by issuers; and inappropriately applying the yield or discount rate from one population to test
securities prices or values in the test population without assessing the comparability of the two groups.
Failure to Test – Includes relying on interim testing and failing to test the assertion there was no material
change in value; relying on interim testing and failing to perform procedures at year end; failing to perform
sufficient substantive procedures when significant risks are identified; failing to perform year end tests when
broker quotes were older than 30 days; failing to perform substantive tests when too much reliance is placed
on internal controls or internal audit; failure to assess whether all assets and liabilities had been identified in a
business combination; failure to test data provided to outside valuation specialist; failure to test the accuracy
and completeness of data that valuation specialists relied on; failure to test fair value when requested pricing
information was not received; failure to test all items in a selected sample; and outright failure to test certain
assets and liabilities.
Disclosures – Includes failure to identify and test controls over FVM hierarchy disclosures; failure to test
FVM hierarchy classification as Level 2 or Level 3; and failure to assess whether an input is observable or
unobservable when testing the FVM hierarchy classification.
Risk Assessment / Controls – Includes the failure to identify and test controls over inputs to FVMs; setting
risk thresholds so high that material errors are not detected; failure to investigate controls over resolution of
pricing differences; failure to identify weakness due to lack of supervision by qualified personnel in the testing
of hard-to-value financial instruments; failure to test controls over the budgetary process; and failure to test
controls over the classification of securities as available for sale.
Projected Financial Information (PFI) Assumptions – Includes failure to evaluate the reasonableness
of assumptions relating to revenue growth rates, capital expenditures, terminal growth rates and the discount
rate; failure to assess the reasonableness of improved margins; failure to consider industry growth rates;
erroneously using PFI from a period prior to a reorganization; failure to evaluate customer attrition rates; failure
to evaluate the risk premium in the issuer’s weighted average cost of capital; failure to evaluate a significant
difference between value indications from the market and income approaches; and failure to assess a change
in weights assigned to various indications of value.
Other Than Temporary Impairment (OTTI) – Includes failure to test controls over the classification of
securities as OTTI; failure to test the issuers’ evaluation of securities as potentially OTTI; and failure to evaluate
the assumptions, calculations and completeness of the issuer’s OTTI test.
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.
9.2%
1.5%
2011
PCAOB
Inspection
Reports
2011 PCAOB Inspection Reports
1.5%
5.4%
5.4%
8.1%20112011
8.1%
FVM
Deficiencies
FVM Deficiencies
9.2%
89.2%
37.5%
37.5%
89.2%
to 2010
20082008
to 2010
FVMFVM
Defi
5.4%5.4%
8.1%8.1%
9.2%9.2%
1.5%1.5%
86.6%
62.5%
62.5%
86.6%
89.2%
89.2%
86.6%
86.6%
Impairment Deficiencies
ment Deficiencies
2011 Impairment Deficiencies
7.4%
While the number of impairment deficiencies decreased modestly in 2011, they were dominated by those
related to goodwill impairments in all four years with 51.9% in 2011, and 57.5% in 2008 to 2010. Most of the
impairment
deficiencies
to long lived asset groups, but there were deficiencies attributable
2008 to remaining
2010 Impairment
2008
toDeficiencies
2010
Impairmentrelate
Deficiencies
solely to intangibles assets each year.
9.6%
9.6%
Impairment
Deficiencies
20112011
Impairment
Deficiencies
2011 Impairment Deficiencies
auses
es
2008 to 2010 FVM 2008
Deficiencies
to 2010 FVM Deficiencies
2011 FVM Deficiencies
2011 FVM Deficiencies
51.9%40.7%
7.4%7.4%
32.9%
57.5%32.9%
51.9%
40.7%
40.7%
51.9%
51.9%
to2008
2010
Impairment
Deficiencies
20082008
to 2010
Impairment
Deficiencies
to 2010
Impairment
9.6%9.6%
Deficiencies
57.5%
Goodwill
Goodwill
Long Lived Asset
Groups
32.9%
32.9%
Intangible Assets
57.5%
57.5%
Long Lived Asset
Groups
Intangible Assets
The underlying causes of audit deficiencies related to impairment tests are shown in the following graphs.
While the underlying causes for impairment deficiencies are similar to those underlying FVM deficiencies,
pricing and disclosure deficiencies were not represented in impairment audit failures. Conversely, asset
mismatch failure was a cause of impairment deficiencies, but not FVM deficiencies. More specific descriptions
of these impairment audit deficiencies taken from the PCAOB inspection reports are provided following the
Impairment Deficiency Causes graphs.
2011
Impairment
Causes
2011 Impairment Deficiency
Causes Deficiency
2011
Impairment
Deficiency
Causes
20082008-2010
to 2010
Impairment
Causes
2008-2010 Impairment
Deficiency
Causes Deficiency
Impairment
Deficiency Causes
Impairment
Deficiency
Causes
8.2%Causes
PFI Assumptions
20112011
Impairment
Deficiency
25.9%
25.9%
55.6%
18.5%
Risk Assessment/
Controls
18.5%
55.6%
21.9%
Failure to Test
25.9%
25.9%
23.3%
55.6%
55.6%
8.2% PFI Assumptions
21.9%
46.6%
23.3%
46.6%
Failure to Test
Asset Mismatch
2
18.5%
18.5%
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acuitas, inc.’s survey of fair value audit deficiencies 20082008-201
Risk Assessment/
Controls
©2013 acuita’s inc.
Descriptions of Impairment Deficiencies
PFI Assumptions – In addition to the PFI assumption deficiencies mentioned for FVM, a deficiency relating
to the failure to test the model, inputs and assumptions used to value a loan portfolio in connection with a
goodwill impairment analysis was identified.
Risk Assessment / Controls – Additional deficiencies were failure to assess the issuer’s methodology for
determining fair value of reporting units, failure to identify deficiencies in controls relating to triggering events;
and failure to assess whether the timing of impairment charge was appropriate.
Failure to Test – An additional deficiency was failure to test the issuer’s assertion that assets were not
impaired and ignoring evidence that triggering events had occurred.
Asset Mismatch – Including failure to identify a mismatch between the group of assets being tested for
impairment and the group of assets included in the calculation of carrying value; and failure to identify an
issuer’s departure from GAAP by allocating goodwill to reporting units.
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.
PCAOB’s Report on Inspections of Smaller Firms5
A report covering the 2007 to 2010 inspections of smaller audit firms was recently made public by the PCAOB.
The report covers 748 inspections of 578 domestic firms and 1,801 audits. It includes general observations as
well as observations about audit areas where deficiencies commonly occur. One of the significant conclusions
is that “While reported significant audit performance deficiencies have decreased, the continued identification
of these deficiencies in audits performed by a large number of triennially inspected firms is of concern.” For
2007 to 2010, approximately 44% of the audit firms inspected had at least one significant audit performance
deficiency. According to the PCAOB, the root causes of audit performance deficiencies are:
• “A lack of technical competence in a particular audit area;
• A lack of due professional care, including professional skepticism;
•
Ineffective or insufficient supervision, which at times may have been due to heavy partner and
professional staff workloads;
• Ineffective
client acceptance and continuance of practices that fail to consider technical knowledge
called for in particular audits; or
• Ineffective engagement quality reviews.”
Among the nine audit areas with common deficiencies cited are deficiencies related to auditing fair value
measurements and deficiencies related to business combinations and impairment of intangible and long-lived
assets.
When auditing FVM, PCAOB standards require that auditors test FVM and disclosures based on the risk of
material misstatement and consider using the work of a specialist. The auditor must also understand the
process for determining FVM and the controls over that process. Substantive tests include testing significant
assumptions, the valuation model, underlying data, developing independent FVM estimates or reviewing
subsequent events and transactions.
Report on 2007-2010 Inspection of Domestic Firms that Audit 100 or Fewer Public Companies, PCAOB Release No. 2013-001,
February 25, 2013.
5
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.
The lack of liquidity and lack of observable market data of financial instruments may increase the risk of
material misstatement. If the auditor relies on external pricing sources, the source should be different than the
source used by the issuer. If there are no observable market prices, the auditor must understand the methods
and assumptions underlying the FVM. Among the more common FVM audit failures is the failure to sufficiently
evaluate the appropriateness of the valuation method and the reasonableness of the issuer’s assumptions.
When developing independent expectations of fair value for corroborative purposes, it is common for auditors
to fail to have a reasonable basis for each assumption and to support the assumptions with audit evidence.
When auditing business combinations, the issuer often makes assumptions about the future including the
amount and timing of future cash flows and discount rates. These assumptions may be subject to greater
uncertainty in times of economic distress. The auditor must evaluate the risk of misstatement, the company’s
process for measuring fair value and controls over FVM. The auditor must evaluate the appropriateness of
valuation methods and the reasonableness of significant assumptions, including those supporting the work
of a valuation specialist.
Typical audit failures for business combinations include the failure to test the fair value of the purchase price
or consideration given, failure to evaluate whether all of the tangible and intangible assets have been identified
and allocated a portion of the purchase price and failure to evaluate the reasonableness of estimated useful
lives and the appropriateness of amortization methods.
When measuring the fair value of goodwill, intangible assets and long-lived assets in an impairment analysis,
the issuer’s prospective financial information will contain assumptions about future events. The auditor’s
requirement to obtain sufficient appropriate evidence to support assumptions in an impairment analysis is
similar to the requirements for supporting FVM assumptions discussed previously.
The PCAOB noted numerous cases where the issuer was a small or development stage company, and the
firm concluded there was a substantial doubt about the issuer’s ability to continue as a going concern. These
companies often had minimal revenues, net operating losses and negative cash flows from operations, yet the
auditors concurred with the issuers’ conclusions that assets were not impairment.
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.
Concluding Thoughts
Based on information in the PCAOB’s report on inspections of smaller firms and our own analysis of PCAOB
inspection reports for larger firms, it is apparent that the number of audits with deficiencies remains high. A
significant number of these deficiencies relate to the auditing of fair value measurements and impairments.
One cause of these deficiencies is the increased complexity of audits resulting from the recent economic
crisis. Measuring the fair value of financial instruments in particular, as well as testing various assets for
impairment became increasingly difficult during this uncertain period. The inspection reports indicate that
audit deficiencies relating to financial instruments were primarily caused by pricing problems and the failure
to adequately test the value. The reports also note that audit deficiencies relating to impairments generally
resulted from failure to adequately test management’s PFI.
While professional judgment is required in both the audits engagements and the PCAOB inspection process,
professionals may reach different conclusions as to the adequacy of the audit process. PCAOB inspection
deficiencies relate to the audit process where the deficiencies were of such significance that the firm failed to
obtain sufficient appropriate audit evidence to support its audit opinion on the financial statements and / or
the effectiveness of internal control. This survey is a summary of publicly available information, the purpose of
which is to hightlight trends in audit deficiencies related to fair value measurements and impairments. A more
complete presentation of the underlying data can be found in the inspection report themselves.
Acuitas, Inc.
Acuitas, Inc. is an Atlanta, Georgia based valuation and decision consulting firm. Additional information about
our firm can be found at www.acuitasinc.com.
For more information about how Acuitas, Inc can help address your valuation-related issues, please contact
Mark Zyla, Managing Director at 404-898-1137 or mzyla@acuitasinc.com.
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acuitas, inc.’s survey of fair value audit deficiencies ©2013 acuita’s inc.