Big week for the Public Company Accounting Oversight Board. Earlier in the week, it sent a warning to the Big Four accounting firms by pinging Deloitte $1 million for violating audit standards. The fine related to the firm's 2003 audit of California-based Ligand Pharmaceuticals. It's the first time any of the Big Four have been fined and it sends the other three a very clear signal.

James Fazio, the former Deloitte partner in charge of the Ligand audit, has accepted a two-year ban from association with any auditor registered with the PCAOB. The PCAOB found that Fazio had failed to adequately audit Ligand's reported revenues from products, nor had he properly taken into account the company's ability to accurately estimate likely returns - given consistent and substantial underestimations in the past. The result was a substantial overstatement of the company's profits. In other words, he colluded in perpetrating a fiction. Worse still, the PCAOB found that Deloitte partners and management were aware of questions about Fazio's competence and failed to exercise due professional care.

As Dan Meyer points out in his Tick Marks blog, there are lessons in this: don't accept engagements if your people aren't up to scratch and even if you don't have a whistleblowing culture, you need some mechanisms in place to ensure the concerns are conveyed to top management.

In her Sequence Inc blog, Tracy L. Coenen says $1 million is not that much but the case could have damaging publicity for Deloitte.

And in another development, the PCAOB has given long overdue guidance for auditors to sort through the risks associated with the subprime credit situation in relation to fair value measurements.

The new standard, introduced last year, puts the reporting of financial assets and liabilities under a single definition of fair value, or how much they are worth on the market as opposed to using historical values. The problem with fair value is that there are many occasions where it's hard to identify a liquid market. When that happens, you have to resort to different methodologies and subjective judgement comes into play. It becomes a case of the company telling shareholders "trust us". Not a good thing in a market so unstable.