Audit Inspections; Auction Securities; IFRS

PricewaterhouseCoopers and Crowe Chizek are the latest auditing firms taken to task by the Public Company Accounting Oversight Board for shoddy audit practices in 2007.

The PCAOB flagged six audits by PwC and two by Crowe Chizek in its 2007 inspection cycle, for violating numerous auditing standards. The reports, published earlier this month, are part of the PCAOB’s promised new zeal to inspect large audit firms and publish the findings more quickly.

In PwC’s report, the PCAOB said it inspected audit records at the firm’s national office and 22 of its 61 U.S. field offices, finding deficiencies worthy of note in six audits. For Crowe Chizek, PCAOB inspectors visited the national office and four of its 22 other locations. They noted two audits, both involving loan losses, where auditors failed to perform enough audit procedures to reach sound conclusions.

The inspectors took exception with PwC’s auditing of some fine points related to goodwill impairment, revenue recognition, a business combination, and amortization of intangible assets. Inspectors also flagged an audit where the firm determined a higher level of risk related to some aging accounts receivable, but failed to track down the receivables or check their valuation.

In its response to the inspection findings, PwC wrote that it performed additional audit procedures as a result of only one of PCAOB’s findings, but it didn’t specify which one. “In only one instance were additional audit procedures required and therefore performed,” PwC wrote. The firm noted it added some additional documentation to audit files, but called the change minor.

“We believe the matters raised on the other issuers were not significant,” PwC said. “In no instances did the additional procedures or documentation impact our conclusions, the issuer’s financial statements, or our reports thereon.”

Inspectors examining Crowe’s work said the firm failed in one audit to test internal controls properly when the firm learned the issuer suffered a loan loss as a result of fraud perpetrated by a customer. It also failed in the same audit to test compliance with hedge accounting rules sufficiently, the report says.

In Crowe’s written response, the firm notes it performed additional procedures and added to its audit files in response to inspection findings. It also noted the ongoing tension between performing sufficient audit procedures to meet PCAOB requirements, against criticisms from public companies of overauditing and excessive costs.

“Some of these involve materiality assessments or the nature and extent of audit documentation,” Crowe wrote. “Auditors need to obtain sufficient, competent evidential matter to support the audit report, while being sensitive to the costs of pursuing and documenting judgments of matters which have a relatively low risk of significant impact on the financial statements. Experienced, well-trained professionals can take different approaches to achieve this balance.”

Survey: Auction Rate Holders Expected Protection

Nearly seven out of eight financial professionals who have held auction rate securities believed dealers would support auctions if bidders failed to appear, according to a recent survey by the Association of Financial Professionals.

Of financial professionals participating in the survey, 69 percent said auction support was implied and 17 percent said they were told explicitly that the dealer would ensure that the auctions would not fail.

Roth

With the collapse of the auction rate securities market, companies seem less focused on rates of return on short-term investments and more concerned with liquidity and preserving principal, says Kevin Roth, director of research and data standards for AFP. Companies have become increasingly conservative with cash holdings and short-term investments, he says.

The findings serve as a reminder to investors to know what they’re buying, Roth says. Auction rate securities have long seemed a safe haven for short-term cash management strategies, but since they’re backed by long-term commitments that nobody currently wants to buy, companies are stuck with a long-haul investment in many cases.

“There’s always a bit of a ‘buyer beware’ message across the board,” he says. “The issue is always about liquidity. It’s not about the instruments backing auction rate securities. Those things for the most part are still paying off. They’re still good. You just can’t sell them.”

PwC Launches IFRS Education Tool

PricewaterhouseCoopers is releasing a suite of educational tools and programs to help universities train budding accountants in International Financial Reporting Standards.

The Big 4 firm is rolling out “IFRS Ready,” an education program that uses videos and interactive financial statements to illustrate how IFRS is applied. The program includes slides, speaker notes, and questions and answers on IFRS that can be used in introductory and intermediate accounting classes.

Wyer

PwC says it has invested more than $1 million into the materials, not including the professional time devoted internally to the development of the teaching tools. Intended for use in academics, they may work in corporate settings too, says Jean Wyer, a partner with PwC who leads the firm’s academic initiatives.

“The materials were initially developed for a student audience,” she says. “However, many of the tools also will be available via our Website to accounting professionals seeking information on IFRS.”

Other Big 4 firms are also working with academics to get IFRS curricula infused into college degree programs, anticipating that sooner or later U.S. regulators will mandate IFRS for public companies. Ernst & Young and Deloitte recently formed programs to work with university faculty, and KPMG recently began hosting faculty forum Webcasts, targeting university faculty with understanding of IFRS, its use in capital markets, and the movement toward U.S. adoption.

KPMG also launched its IFRS Institute to help educate capital markets in general—companies, investors, and academics—about IFRS. Manny Fernandez, national managing partner for KPMG, says the firm expects to develop live forums to be presented around the country as well.