Audit Deficiencies Remain a Risk
CPAs involved in the audit process must commit to seeing audit deficiency improvements.
As CPAs, we’re often lauded as watchdogs of the public
good, the most trusted business advisors, and gatekeepers
of corporate financial integrity. But ongoing audit quality
issues threaten the credibility, objectivity, and integrity that
our profession is built on.
Back in 2015, our INSIGHT Special Feature, “Audit Quality& the CPA Brand
,” shed light on the risks audit deficiencies
pose and the unreasonably high percentage of audits with
deficiencies (39 percent among the Big Four). We also
joined other voices in the profession to encourage CPAs and
professional bodies to do more to restore overall audit
quality, particularly in complex audit areas. Recent survey
data shows there’s still a long way to go.
First, the good news: Progress has been made. Analyzing
Public Company Accounting Oversight Board (PCAOB) data
from 2009 to 2016, Acuitas’ 2017 “Survey of Fair Value
Audit Deficiencies” reveals the percentage of deficient audits
has dropped from its dramatic peak in 2013. The not so
good news is that the percentage of audits with deficiencies
still stands at 31.6 percent.
“It’s apparent that the number of audit deficiencies remains
high,” says Mark Zyla, a leading expert on fair value and
managing director of Atlanta-based valuation and litigation
consultancy firm Acuitas Inc.
Zyla points to the surge in merger and acquisition (M&A)
activity as one of the modern drivers of audit deficiencies
and financial risks. In fact, the robust pace of M&A activity
has caught the PCAOB’s eye, who warns it poses economic
risks and escalates the prospect of material misstatements.
“Fair value measurement (FVM) and impairment audit
deficiencies are increasingly attributable to a surge in
business combination engagements,” Zyla explains. “FVM
deficiencies related to business combinations increased to
68 percent in 2015, up from 56 percent in 2014.”
“Based on our analysis, failures to assess audit risks as well
as test internal controls and assumptions underlying
prospective financial information are the root causes of most
FVM and impairment audit deficiencies,” Zyla continues.
To stem the risks of reverting back to rising audit deficiencies
across the board, the PCAOB is calling for heightened
responsiveness from management and increased use of
quality control aids. Zyla seconds that by encouraging the
industry and accounting firm leaders to commit to more
quality control measures and ensuring due professional
care. Most of all, CPAs involved in the audit process must
commit to seeing audit deficiency improvements—especially
in critical and complex audit areas—and fulfilling their
responsibility of providing the highest quality.
Acuitas’ survey reveals several trends and statistics critical to
understanding the root causes of spiking FVM and
impairment audit deficiencies. The complete survey is
available from Zyla via email (firstname.lastname@example.org). The
INSIGHT Special Feature, “Audit Quality & the CPA Brand,”
can be downloaded here.