The Public Firm Accounting Oversight Board’s goal crew of inspectors centered on particular goal acquisition firms, fraud, going concern points, money and money equivalents throughout its inspections of auditing companies final 12 months, in response to a brand new report.
The report, launched Wednesday, famous that the goal groups look extra intently at rising audit dangers and subjects the inspections workers believes may have necessary implications for audits. One of many focus areas was SPACs, also called blank-check firms, that are principally shell firms whose goal is to do a reverse merger with one other firm to speed up the method of going public. The Securities and Change Fee has highlighted a number of the issues with SPACs, proposing new guidelines in March for disclosures, advertising practices, sponsors and conflicts of curiosity. In early April, the SEC additionally issued a press release on the right accounting for warrants used to draw SPAC sponsors (see story). SPAC exercise has declined steeply this 12 months as the marketplace for them has dropped amid the elevated regulatory scrutiny and a wave of economic restatements.
The PCAOB can also be apparently taking a better take a look at the companies that audit SPACs. The goal crew tried to get an understanding of the rising dangers associated to SPACs by inspecting the interim opinions of the businesses’ quarterly monetary data. They centered on assertions for SPACs and de-SPAC transactions such because the accounting therapy and valuation of warrants, the accounting therapy of reverse mergers, interim monetary assertion presentation and disclosures, and restatements associated to redeemable shares, warrants and different accounts.
They noticed situations the place the audit engagement groups did not level out that the general public firm’s fairness assertion didn’t agree with its accounting data, nor think about whether or not the presentation and disclosures of the interim monetary statements conformed with U.S. GAAP, or establish an error within the public firm’s monetary assertion honest worth disclosure the place the general public warrants have been incorrectly included within the honest worth rollforward.
Then again, the PCAOB did see some good practices like bringing in specialists. “An audit agency’s nationwide workplace tracked de-SPAC transactions and reached out to engagement groups to facilitate discussions on monetary devices which will require engagement groups to contain auditor-employed specialists with monetary instrument experience,” mentioned the report. “The audit agency recognized accessible specialists and related them to the engagement groups.”
The PCAOB goal crew additionally appeared for situations of fraud at numerous sorts of public firms throughout its audit inspections. On the whole, it discovered the auditors demonstrating skilled skepticism in response to elevated fraud dangers.Â
“The audit crew’s response to the chance of fraud was a key space of focus for each audit the goal crew reviewed in 2021, given the potential elevated danger of fraudulent monetary reporting as a result of present financial surroundings,” mentioned the PCAOB. “This danger might manifest, for instance, in administration’s use of extra aggressive assumptions and estimates, improper income recognition, and/or deceptive disclosures.”Â
Among the many good practices it noticed was an engagement crew that attempted to establish potential related-party transactions by querying a database of firms registered as companies in a specific state to find out if some other companies have been related to the corporate’s staff. One other engagement crew expanded its inquiries to incorporate 20 questions addressing a specific firm’s particular information and circumstances, with open-ended questions on the monetary reporting course of, vendor relationships, inside compliance coverage, interactions with instant supervisors, and the influence of COVID-19 on controls and sources. Many audit companies additionally applied a brand new requirement to contain their forensic workers within the engagement crew’s fraud risk-assessment procedures for all public firm audits within the retail and lodging industries to protect in opposition to fraud dangers associated to income recognition.
The goal crew additionally checked out going concern evaluations, assessing whether or not auditors appropriately evaluated if there was substantial doubt about an organization’s means to proceed as a going concern in gentle of the financial surroundings. Nevertheless, the PCAOB inspectors noticed a number of audits the place the engagement groups did not carry out adequate procedures to guage whether or not there was substantial doubt in regards to the firm’s means to proceed as a going concern.Â
The PCAOB additionally uncovered issues with audits of money and money equivalents. “Elevated audit danger may come up from preparations for holding money and money equivalents, comparable to these involving the usage of trustees, restrictions on money balances, offshore accounts, and complicated phrases and circumstances,” mentioned the report. “In 2021, the goal crew centered on truth patterns seen in latest high-profile occasions involving money, which might elevate questions on audit companies’ procedures to handle the audit dangers related to money and money equivalents.”
In some circumstances, the engagement crew did not carry out adequate procedures to assist the validity of the confirmations acquired, comparable to contacting the purported sender by telephone or different means to verify the money affirmation e-mail response was truly despatched by a licensed respondent, and in different circumstances the audit work papers did not adequately doc the affirmation procedures.