Fair Value Continues to Trip Up Auditors

Audit deficiencies attributable to fair-value measurement are increasingly related to business combinations as opposed to financial instruments.
Matthew HellerSeptember 30, 2014
Fair Value Continues to Trip Up Auditors

About 42% of all audits inspected by the Public Accounting Oversight Board in 2012 were deficient, with the number of deficiencies attributable to fair value measurement (FVM) continuing to be significant, according to a new report.

200397990-001FVM deficiencies have continued to decline from their peak in 2010, the CPA firm Acuitas said in its third annual “Survey of Fair Value Audit Deficiencies,” but still accounted for 24.6% of all audit deficiencies in 2012.

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FVM deficiencies were 30.9% of all deficiencies in 2011 and about half of all deficiencies in 2010.

“The recent decrease in FVM audit deficiencies relating to the pricing of financial instruments is likely the result of audit firms’ responses to PCAOB inspection reporters, auditors having more experience dealing with FVM audit issues, and an improvement in economic conditions,” said Acuitas managing director Mark Zyla in a news release.

The firm identified a “significant shift” in the causes of FVM deficiencies from financial instruments to business combinations.

Whereas before 2012, 86.9% of FVM deficiencies were caused by insufficient testing of financial instruments, that percentage dropped to 55% in 2012. Meanwhile, FVM deficiencies relating to business combinations increased to 45% of all FVM deficiencies, up from 9% in the 2008-2011 period.

There was also a sharp increase in the number of FVM and impairment deficiencies caused by failures to assess risk and identify or test internal controls. Risk assessment and control deficiencies caused 41.2% of the FVM deficiencies and 50% of impairment deficiencies cited by the PCAOB in 2012.

“Auditors should focus on assessing risk and test internal controls relating to fair value measurements in business combinations and testing goodwill and other intangible assets for impairment,” Zyla recommended.

The survey’s findings are based on an analysis of the PCAOB’s 2012 audit firm inspection reports. Of the 80 available inspection reports from 2008 to 2012 for the top 25 audit firms, 63.7% had FVM and impairment audit deficiencies, Acuitas said.

According to Acuitas, the percentage of audits with deficiencies more than doubled between 2009 and 2010 from 16.0% to 33.7%. Since then, it has climbed to 37.5% in 2011 and 42.5% in 2012.

Auditing standards describe a significant audit engagement deficiency existing “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.”

Source: Accounting Today Fair Value Audit Deficiencies Remain High at Firms

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