insight magazine

Audit Deficiencies Remain a Risk

CPAs involved in the audit process must commit to seeing audit deficiency improvements. By Derrick Lilly | Winter 2017

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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 (mzyla@acuitasinc.com). The INSIGHT Special Feature, “Audit Quality & the CPA Brand,” can be downloaded here.