The PCAOB disciplined the Ibarra audit firm because the auditors failed to identify and address a departure from GAAP relating to their client’s valuation of inventory. GAAP requires inventory to be valued at the lower of cost or market value. The PCAOB’s inspection report notes that the client’s consolidated balance sheet reported inventory of $356,973, or approximately 95% of total assets. However, based on cost of goods actually sold during that fiscal year, the client’s inventory balance represented approximately 22 years’ worth of sales. This fact alone should have increased the auditors’ skepticism about the inventory’s stated value. Instead, the auditors relied solely on management’s representation regarding the valuation of inventory and mechanical tests of inventory costs, and they missed the big picture.

Obtain a copy of PCAOB Release No. 2006–009 which describes this case.

a. Identify the pervasive problems that were detected by the PCAOB in its inspections of Ibarra.

b. Comment on the nature of punishments that were imposed. Were the punishments appropriate?

c. What conduct of Ibarra strikes you as the most unethical in this situation?