The PCAOB said since the two worked on about 25 engagements and audits, functioning as each other's concurring reviewers on most, there was little time for supervising assistants and many audits involved little more than referring assistants to standardized audit programs and checklists. Assistants received little training.
Trouble arose after the PCAOB on Aug. 1, 2008 and May 6, 2009, requested a variety of audit documents. However, many that were submitted were created or changed months after the documentation completion dates. Changes were not annotated with actual changes or the identity of who made the changes. The PCAOB said Chisholm and Nilson knew this effort was designed to mislead its Division of Enforcement and Investigations.
In the case of Hendrix, the 2006 financial statements showed that goodwill of almost $32 million was 74 percent of total assets. Despite declining revenue of 50 percent and legal disputes over the ownership of some of the company's Chinese patents, the CPAs did not gain an understanding of how management developed its estimate of the value of goodwill. They eventually comprised with management in impairing goodwill by only 25 percent.
In the case of Powder River, a defunct company which had oil-and-gas drilling operations, the CPAs failed to detect that the company inflated revenue and omitted major liabilities from its balance sheet. The SEC noted that Nilson had limited experience in audits of such companies. Instead of gaining a greater understanding of that business, he relied on general descriptions by Chisholm.