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PCAOB Finds High Rates of Deficiencies in SPAC Audits

S.J. Steinhardt
Published Date:
Apr 27, 2023

iStock-621844198 Audit

Inspectors at the Public Company Accounting Oversight Board (PCAOB)  have observed relatively high rates of audit deficiencies in special-purpose acquisition companies (SPACs), the board reported.

“SPACs typically have no commercial operations and are public companies formed solely to raise capital to merge with or acquire a private company, effectively taking it public,” the report noted.

U.S. markets experienced an unprecedented surge in the number of initial public offerings (IPOs) by SPACs in recent years: from 46 in 2018 and 59 in 2019 to 248 in 2020 and 613 in 2021, the report indicated in a chart. There were 84 in 2022, a drop attributed to increased regulatory scrutiny and rising interest rates, according to CPA Practice Advisor.

The PCAOB reviewed 44 SPAC-related audits performed in 2021, of which 27, or 61 percent, had at least one deficiency. Of the 71 SPAC-related audits performed in 2022, 26, or 37 percent, had at least one deficiency.

In conclusion, the report urged auditors to do the following:

    ● Exercise due professional care and professional skepticism;
    ● Consider whether presentation and disclosures in the financial statements conform with [generally accepted accounting principles];
    ● Communicate with the public company’s audit committee about any significant changes to the fraud or other significant risks initially identified in the planned audit strategy and the reasons for such changes;
    ● Understand the public company’s processes to develop its accounting estimates, including the methods, data, and assumptions used;
    ● Remain alert to changes in the public company’s or the auditor’s circumstances which may give rise to situations that could impair auditor independence;
    ● Consider the nature of the public company, the risks of material misstatement, and each audit engagement team member’s knowledge, skill, and ability when assigning work to engagement team members and determining the necessary extent of supervision; and
    ● Identify and assess the risks of material misstatement due to error or fraud throughout the audit.

    Mergers and acquisitions, including de-SPAC transactions, are among the PCAOB’s 2023 inspection priorities.

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