PCAOB Publishes Staff Audit Practice Alert on Auditor Considerations of Litigation and Other Contingencies Arising from Mortgage and Other Loan Activities

The Public Company Accounting Oversight Board today published a Staff Audit Practice Alert to inform auditors of public companies about their responsibilities when auditing loss contingencies, disclosures, and related items. The staff has taken this action in light of reports that began to surface in the fall alleging that companies may have misrepresented the quality of many loans sold for securitization and that those companies could be required to repurchase the affected mortgages, creating an exposure for the banking industry of up to $52 billion. Additionally, allegations have surfaced that irregularities in the foreclosure process could result in further losses.

"Auditors should be aware that the potential risks and costs associated with mortgage- and foreclosure-related activities could have implications for audits of companies involved in those activities," said Martin F. Baumann, Chief Auditor and Director of Professional Standards.

The practice alert advises auditors that these mortgage- and foreclosure-related activities or exposures could have implications for audits of financial statements or of internal control over financial reporting. These implications might include accounting for litigation or other loss contingencies and the related disclosures.

In December 2008, Staff Audit Practice Alert No. 3, Audit Considerations in the Current Economic Environment, was issued to assist auditors in identifying matters related to the current economic environment that might affect audit risk and require additional emphasis. Audit risk that existed in December 2008 with respect to contingencies and guarantees as well as other issues continues to exist today.

Staff Audit Practice Alerts are issued by the PCAOB to highlight new, emerging, or otherwise noteworthy circumstances that may affect how auditors conduct audits under the existing requirements of PCAOB standards and relevant laws.

Auditors should determine whether and how to respond to these circumstances based on the specific facts presented. The statements contained in Staff Audit Practice Alerts are not rules of the Board and do not reflect any Board determination or judgment about the conduct of any particular firm, auditor, or any other person.