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December 14, 2008

PCAOB releases inspection review

The Public Company Accounting Oversight Board (PCAOB) has released a report reviewing the first four years of inspections of the nation’s eight largest audit firms.

The report summarises deficiencies identified in audits by BDO Seidman, Crowe Horwath, Deloitte, Ernst & Young, Grant Thornton, KPMG, McGladrey & Pullen and PricewaterhouseCoopers. It does not identify any shortcomings specific to the individual firms.

Across the board

Deficiencies were found in both established and emerging audit areas. Areas where they occurred included revenue, fair value, management’s estimates, and the determination of materiality and audit scope.

The shortcomings occurred across the board, including in some of the larger audits reviewed.

The board noted that in some cases the deficiencies appeared to have been caused by a failure to apply an appropriate level of professional scepticism when conducting audit procedures and evaluating audit results.

Over the four years of inspections, inspectors found improvement in most areas where deficiencies had been identified.

Deficiencies declined in some well-established audit areas, including confirmation of accounts receivable and the audit of income tax accounts.

Where quality control deficiencies had been identified, firms subsequently changed audit methodologies, processes or related quality control systems.

The report categorises deficiencies into three areas: departures from GAAP; auditing deficiencies, referring to where the firms failed to conduct audits in accordance with PCAOB standards; and deficiencies in quality control functional areas.

The most common GAAP departures related to income taxes, derivatives, revenues and cash flow presentations.

The most common audit deficiencies related to revenues, accounting estimates, auditing fair value measurement, analytical procedures, income taxes, internal control, audit sampling, use of specialists, and materiality, audit scope and audit differences.

Deficiencies in quality control functional areas usually related to partner evaluation and certain other aspects of firm structure, organisation and management, internal inspections, foreign affiliates and independence.

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