Increase in mergers & acquisitions
High cash levels, low interest rates, and shareholder pressure for growth have stimulated merger and acquisition activity not seen for some time. More
experienced members of the engagement team usually handle audit procedures for business combinations, yet problems still arise. In addition, while the revised business combination accounting standards have been in place for more than five years, even senior members of the audit team may lack sufficient
experience in this area due to the relatively low level of merger and acquisition activity until recently. Inexperience may lead to the auditor failing to detect
material misstatements in the accounting for a business combination.
PCAOB inspectors have observed a range of deficiencies related to auditing business combinations. For example, in some cases, auditors have relied on
controls without testing them. Inspectors have also observed auditors failing to test company-produced data that are used to prepare cash flow projections
to support fair value measurements. In other cases, auditors have failed to detect that management had not identified all the intangible assets that needed to be valued, such as customer-related intangible assets.
Potential Questions for Your Auditor
- Does your auditor have the expertise necessary to address the audit issues that may arise from the reporting requirements related to business combinations as well as other effects of a business combination that may bear on financial reporting, such as the effects on segment reporting? If not, how will your auditor obtain or develop that expertise?