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PCAOB Delivers Bad Inspection News to 3 More Firms

Tammy Whitehouse | December 26, 2012

Three major audit firms received less than glowing inspection reports from the Public Company Accounting Oversight Board, continuing a theme of high failure rates that the audit regulator is hammering firms to fix.

The latest reports for Deloitte & Touche, Ernst & Young, and Grant Thornton say that in four cases concerns raised by inspectors ultimately led to restatements, two for Deloitte and one each for E&Y and Grant Thornton. Deloitte showed a slight improvement in its failure rate from 2010 to 2011, but the failure rates rose for both E&Y and Grant Thornton, according to the reports.

Inspectors dug into 56 audit reports at E&Y and found problems with 20 of them for a failure rate of 36 percent. That's a big increase over the 21 percent rate of problem audits in the firm's 2010 inspection report. Grant Thornton, likewise, saw a jump in the rate of problem audits from 37 percent in 2010 to 43 percent in 2011. Deloitte, however, showed some improvement from a problem rate of 45 percent in 2010 to 42 percent in 2011.

None of the three firms challenged the PCAOB findings in their letters to the PCAOB that are attached to their inspection reports. Each firm simply acknowledged the PCAOB's findings, indicated they complied with auditing and documentation standards in making adjustments called for by inspectors, and said they are working internally to improve audit quality.

The PCAOB earlier published its latest inspection findings for PwC and KPMG. While KPMG's failure rate held fairly steady around 22 percent, the rate jumped for PwC, from 37 percent in 2010 to 41 percent in 2011. The board also offered no improvement in its findings at McGladrey.

The most commonly cited audit problems for all the major firms center on many of the same areas that have been problematic for several years -- issues around allowance for loan losses, impairments, fail value, revenue recognition, and problems with internal control over financial reporting. In its letter to the board, PwC challenged the PCAOB to step up progress on some auditing standards that would give auditors more concrete guidance on how to handle some of the toughest areas of auditing that are most often cited by inspectors.

PCAOB Member Jeanette Franzel recently warned the board is not seeing the improvement in its 2011 inspection cycle that it hoped for after 2010 inspections were complete. The board recently published a summary report of the problems it sees most frequently among the major firms in the audit of internal control over financial reporting, and it is developing another report that will summarize its greatest concerns with respect to financial statement audits. The board also is working on an additional report to summarize the themes it has identified in audits performed by smaller firms, or those that audit fewer than 100 issuers.