The Public Company Accounting Oversight Board has issued an alert to auditors to remind them to take a hard look at “significant unusual transactions” and the risk that they may be driven by error or fraud.
Staff Audit Practice Alert No. 5, Auditor Considerations Regarding Significant Unusual Transactions, is a compilation of existing auditing standards regarding how auditors should review significant unusual transactions in interim financial information and audits of financial statements.
Marty Baumann, the PCAOB’s chief auditor and director of professional standards, said in a statement the alert expands on the message of Staff Audit Practice Alert No. 3, Audit Considerations in the Current Economic Environment, by looking more closely at the risk of misstatement arising from significant unusual transactions. It is “a risk that the staff believes continues to exist today,” the PCAOB said.
The alert makes no mention of any particular event or trend that inspired the staff to issue it, but the connection to the significant unusual transactions described by Lehman Brothers’ bankruptcy examiner is hard to miss. Lehman’s accounting for repurchase transactions and Ernst & Young’s role as auditor is getting close scrutiny after the examiner described aggressive accounting maneuvers to shuttle debt off the balance sheet. E&Y has defended its audit work and has assured its clients it will prevail in any legal challenge.
Alert No. 5 groups auditing requirements with respect to unusual transactions into some key topical categories: identifying and assessing risks of material misstatement, responding to risks of material misstatement, consulting others, evaluating financial statement presentation and disclosure, communicating with audit committees, and reviewing interim financial information.
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