The Public Company Accounting Oversight Board has put auditors on notice. in the wake of the economic meltdown, they need to exercise extreme scepticism.
The PCAOB has put out a report telling auditors what to watch out for, pointing out this economic climate will increase risk and make their work more difficult. Stuff to watch out for include the adequacy of internal controls and whether the company is actually coming clean. And fair value will shape up as a critical issue, particularly in relation to derivatives.
PCAOB chairman Mark Olson, according to this report, has warned auditors they will need to get tougher because of the economy. "The current economic climate will likely require auditors to take a hard look at other areas, such as the collectability of receivables, potential inventory obsolescence and the impairment of other assets, such as deferred taxes and goodwill. The application of [Financial Accounting Standard] 157 [on how to measure the fair value of assets] will be a critical issue for audits of 2008 financial statements."
The unanswered question is whether there will be enough auditors showing some backbone, particularly in this climate. Watch this space.
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