An increase in mergers and acquisitions is causing big mistakes inside finance departments
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Acuitas, an Atlanta-based valuation and litigation consultancy that specializes in fair value measurements, conducted an analysis of Public Company Accounting Oversight Board (PCAOB) inspections and found that corporate auditors are struggling to keep up with mergers and acquisitions following the 2007 financial crisis.
In its 2015 survey of fair value audit deficiencies, Acuitas found that 49% of fair value measurement (FVM) audit deficiencies in 2013 were attributable to an increase in mergers and acquisitions activity.
That's an increase of 4% from the same study in 2012 and an increase of 9% on average from 2008 to 2011.
The study discovered numerous mistakes being made by finance departments. Those errors include improperly testing data for cash-flow projections and improperly testing how management techniques were being used to value assets. In other instances, the finance team was failing to find intangible assets that needed to be assigned a value.
"We have seen a significant shift from the years where FVM deficiencies were largely the result of financial instruments to the current trend of business combinations and a failure to test or understand financial assumptions," said Mark Zyla, managing director of Acuitas.
"This shift has likely been caused by audit improvements for financial instruments that resulted from the PCAOB inspection process and by increased merger activity in recent years," he said.
The PCAOB discovered that 43% of all audits had deficiencies, compared to 16% in 2009. They also found that fair value measurement and impairment deficiencies accounted for 31% of those errors.
At the top 25 firms investigated, the PCAOB discovered that 45% of all deficiencies were caused by errors in FVM issues surrounding risk assessment and internal controls testing. Only 22% of errors were blamed on FVM deficiencies from 2008 and 2012.
"The auditing community should certainly be concerned about the continuing increase in deficiencies caused by a failure to assess risk and internal controls, and the PCAOB's assessment that they are caused by 'a lack of due professional care,'" Zyla said.