PCAOB reports on SPAC risks to investors

By Jay Fishman, J.D.

The Public Company Accounting Oversight Board (PCAOB) has just released a staff report on the risks to investors from special purpose acquisition companies (SPACs). Specifically, from more than 100 audits of SPAC IPOs or de-SPAC merger transactions conducted between 2020 and 2022, PCAOB staff found pervasive instances of accounting deficiencies and noncompliance with PCAOB standards or rules.

Accounting deficiencies. Accounting deficiencies consisted of auditors failing to:

• Evaluate procedures that control owners performed to assess the reasonableness of the prospective financial information assumptions used to value intangible assets, as well as the procedures to identify items for follow up, and the procedures to determine whether those items were appropriately resolved; and
• Evaluate the review procedures that control owners performed to assess whether the consideration transferred was appropriate and whether excluded items were required to be accounted for as separate transactions.

Noncompliance with PCAOB standards. Here, the PCAOB found that engagement teams did not:

• Communicate in writing to the audit committee that a material weakness was identified during the audit;
• Communicate to the public company’s audit committee its assessment of critical accounting policies and practices and its conclusions regarding critical accounting estimates that were disclosed in the public company’s required reporting such as: (a) accounting for the acquisition as a reverse acquisition, or (b) the useful lives of assets and inputs used to calculate the tax receivable agreement liability; and
• Establish an understanding of the terms of the audit engagement with the audit committee, record such understanding in an engagement letter, and provide the engagement letter to the audit committee.

Takeaways. Key takeaways from the report include: (i) exercising due professional care and professional skepticism, (ii) considering whether financial statement presentation and disclosure conform to GAAP, (iii) understanding the public company’s processes for developing its accounting estimates, and (iv) remaining alert to changes in the public company’s or auditor’s circumstances to prevent impaired auditor independence from occurring.

While SPAC transactions have decreased this year, PCAOB inspectors have included them on their list of 2023 priorities. SPAC inspections will, therefore, continue.