The PCAOB's findings from an annual inspection revealed that years after the financial crisis both auditing firms were not adequately challenging companies' valuations of certain assets when the market for them dried up.
The fair value accounting requires US companies to mark certain assets to their market price. When a security is no longer tradable, companies are allowed to use other inputs to help derive a value. During the financial crisis, banking lobbyists pressed the SEC to relax accounting rules over fair value accounting, which they said were exacerbating troubles at big banks.
KPMG failed in seven audits completed in 2010. In three of those audits, KPMG obtained multiple prices from third parties but used the price closest to its client’s price when it was testing the fair value measurements.
In auditing two clients' valuation of hard-to-value assets, including certain mortgage-related assets, PwC attempted independently to evaluate the clients' prices but used the same third party company the client used. PwC obtained certain financial information as of a date nine months before the issuer’s year end and used it in evaluating the issuer’s estimate of fair value at year end.
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