You Can’t Live With Them, But You Can’t Live Without Them…

And the point is?

We’re still waiting for the results of the PCAOB inspection of PwC, after the lousy results of E&Y and KPMG most recently. Is there a reason why companies continue to pay for this service? Why not just hire the PCAOB and cut out the middlemen?

PCAOB Audit of Deloitte Causes Restatement, Again

Another client of Deloitte & Touche has announced the need to restate at least three years’ worth of financial statements to address incorrect accounting for interest-rate swaps. In both cases, the Public Company Accounting Oversight Board found the error during its inspection of the audit firm.

Alliance Imaging Inc. announced it would restate its financial statements to correct the accounting for interest rate swaps that it entered into in 2004. The diagnostic imaging services company expects the restatement to result in a cumulative $1 million decrease to interest expense realized from 2004 through the first quarter of this year.

Last week, Tenneco Inc. made a similar announcement and said that by now using mark-to-market accounting for the swaps, the company will increase the pre-tax interest expense it reports by $6 million for the affected periods.

Since 2004, both companies had been using the so-called “short-cut” method of fair-value hedge accounting under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. However, interest-rate swaps that qualify for the “short-cut” method of hedge accounting must match the terms of the debt they are hedging. If the swaps and the debt constitute “mirror images” of each other, the company can assume that the changes in the value of the hedges and the underlying debt exactly offset each other — and thus have no effect on earnings.

In its review of Deloitte’s audits, the PCAOB auditors noticed an issue that Deloitte had apparently overlooked: there were indeed differences between the swaps and the underlying debt. The swaps, therefore, failed to meet the mirror image requirements of the short-cut method.

In response to a query about the Tenneco announcement, a Deloitte representative told last week said that “professional standards preclude us from commenting on client matters that are confidential.”