PCAOB slams E&Y audits

The US audit watchdog has slammed Ernst & Young’s audit of an
unidentified mortgage company.

The Public Company Accounting Oversight board found problems with the audit,
among other audits it has reviewed, and stated in its report that the firm
‘failed to perform substantive procedures to test whether the repurchases of
whole pool mortgage loans had been made in accordance with the terms of the
related mortgage loan sales agreements, in order to determine whether the
accounting treatment related to these loans was appropriate.’

The mortgage company had provided financing to certain non-affiliated
entities, which used the financing to originate mortgage loans. In certain
cases, the company then purchased these mortgage loans.

But the PCAOB noted no evidence in the audit documentation, and no persuasive
other evidence, that E&Y had evaluated whether these non-affiliated entities
were variable interest entities, as required by accounting standards.

On a second company audit assessed by the PCAOB, the firm was found to have
failed to perform sufficient procedures to test the company’s allowances for
notes and accounts receivable, as the firm failed to test the reasonableness of
the specific reserve percentages the company applied, other than by comparing
them to the prior year, obtaining issuer-prepared schedules, and holding
discussions with management.

‘While the Firm also performed analytical procedures in support of its
testing, these procedures lacked sufficient precision to detect misstatements
that might, individually or in the aggregate, be material. In addition, there
was no evidence in the audit documentation, and no persuasive other evidence,
that the Firm had tested the issuer’s aging of notes receivable,’ the PCAOB

In a separate audit, the firm failed to perform appropriate substantive tests
of certain software development costs that the issuer had capitalised in the
year under audit. While the firm tested the issuer’s relevant internal controls
and reviewed checklists prepared by the issuer, there was no evidence in the
audit documentation, and no persuasive other evidence, that the firm had
performed substantive procedures to test the issuer’s assertion that
technological feasibility had been obtained, such as reviewing a detailed
program design or a working model.

The firm responded to the report stating: ‘Although we do not always agree
with the characterization in the report of the work we performed or the related
audit documentation, in some instances we did agree to perform certain
additional procedures or improve aspects of our audit documentation in response
to the inspection. In no instance did these actions change our original audit
conclusions or affect our reports on the issuers’ financial statements.’

Further reading:

the full PCAOB report

Related reading