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Deloitte's 2006 Inspection: A Fair Value Flavor

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Posted by: Jack Ciesielski	6/22/2007 1:27 AM
The PCAOB released its report on the 2006 inspection of Deloitte & Touche. You can find the report here. Face it: we're not in 2000 any more. Firms aren't self-immolating the way they used to, and auditors - we think - are doing real audits. So, you would hope to find less outrageous findings from the PCAOB inspectors than in the past. Nevertheless, there's one interesting point in the Deloitte inspection report - and it's not about Deloitte, directly. The PCAOB has lately been concerned about fair value reporting and more specifically, how auditors should be auditing fair values appearing in financial statements. (Also see this story by Sarah Johnson in CFO.com.) The PCAOB's concern over fair value auditing is apparent in the Deloitte report; quite a few of their comments showed that their inspection efforts were aimed at making sure the auditors were paying attention to fair values: In one audit, "the issuer incorrectly determined the fair value of warrants issued to purchase common stock because it used a block sale discount in doing so. The Firm should have identified and addressed this departure from GAAP before issuing its audit report." In another audit, Deloitte hadn't completely verified the client's assertions about fair value in a goodwill impairment test. In another fair value episode, the Deloitte staff had tested (for impairment reporting) the fair value of trademarks as a group rather than individually as called for by Statement No. 142. On another audit, the team involved didn't test the fair value of an allocation of purchase price to the fair value of an acquired intangible asset. Similarly, on another engagement, a valuation specialist had been employed to assign fair values to intangible assets acquired by the audit client in a significant acquisition - but there was no evidence of testing of the specialist's assumptions by the auditors. It seems that the PCAOB is being proactive rather than reactive. Instead of waiting for an accident to happen, it's pushing auditors to focus on fair values in their auditing process - and in turn that might make auditing firms invest more in the education of their staff in this area. If that's what the PCAOB is trying to accomplish, applaud loudly - it's the purchase of an ounce of prevention, versus pounds of regulatory cure. Wisdom at last.

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