Since the passage of the Sarbanes-Oxley Act of 2002 (typically called “SOX” in accounting realms), accounting firms that provide audit functions for public companies have been under the purview of the Public Company Accounting Oversight Board, or PCAOB. The PCAOB inspects a selection of audits performed each year and reports their findings from each inspection, reporting the types and numbers of deficiencies found in each inspection made.
Business valuation issues, which require subjective assumptions and are typically assessed by specialized practitioners, have been playing an increasing role in audited financials over the past few decades. And, not surprisingly, valuation issues have had an increasing role in the PCAOB’s inspections.
By looking at the PCAOB inspections between 2009 and 2012, we can watch some interesting indicators of audit deficiencies. For example, the percentage of audits that contained deficiencies decreased from roughly 70% to roughly 40% from 2009 to 2012. This is a good indicator for the public company accounting industry in general. However, during that same time, deficiencies related to valuation issues (as a percentage of total deficiencies) have increased almost 20%.
Interestingly, contrary to the 20% increase described, deficiencies related to valuation issues in goodwill impairment analyses have declined sharply, likely due to the implementation of the “Step Zero” that the Financial Accounting Standards Board (FASB) adopted in 2011. The Step Zero allows a company to perform a subjective self-analysis with lower threshold requirements.
However, during that same period, valuation-related deficiencies in purchase price allocation analyses have shown a marked 100% increase. Having a valuation specialist with the requisite skills and experience is essential to minimize these types of valuation related deficiencies.
At IAG, we bring our deep experience in purchase price allocations and goodwill impairment analyses (including performing SAS 73 reviews by all national and regional accounting firms) to each project, allowing you or your clients to focus on the rest of the audit process. Contact Dan Branch dan@iagforensics.com (770-635-1582) to learn about our valuation services for your financial reporting needs. How can we help?
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