BDO shows improvement in latest PCAOB inspection

While that rate is still higher than for nearly all other major firms – KPMG’s was worse at 50 percent – it’s the first time BDO’s rate has fallen below the 50 percent mark since 2011.

While the PCAOB conducts risk-based inspections, selecting audits to inspect based on where it most expects to find problems, it applies the same approach across all firms. That means the rate is not correlated to the quality of audits at any one firm, but it provides a point of comparison across firms.

The PCAOB says in 2017 it dug into portions of 23 audit files at BDO to study the firm’s work in auditing 2016 financial statements. Inspectors identified problems in nine of those 23 files, and two companies restated their financial statements afterward. The firm withdrew its internal control opinions for two issuers after inspection findings as well, according to the inspection report.

In a letter attached to the report, BDO says it evaluated each of the matters raised in the report and addressed them according to professional standards and the firm’s internal policies. “We remain committed to making audit quality our top priority,” the firm wrote. “The PCAOB’s inspection process assists us in improving our audit performance and our underlying quality control systems.”

In addition to the comment contained in the report, the firm said it supports the PCAOB’s inspection process and its goal of protecting investors and enhancing confidence in the audit profession. “The firm dedicates substantial time and resources to the ongoing enhancement of our quality control programs and to the delivery of effective, efficient, technology-enabled, and technically compliant audits,” the firm said.

Of the nine audits where the firm performed deficient audit work, seven contained deficiencies in both the audit of internal control over financial reporting and the audit of primary financial statements. Inspectors said auditors struggled most often with testing the design and/or operating effectiveness of controls selected for testing, although problems also emerged in evaluating significant assumptions or data used to develop estimates and in identifying and testing controls.

Across the eight issuers where inspectors found problems with internal control auditing, the inspection report indicated inspectors identified 25 separate errors, seven of them in one audit alone. In terms of accounts, problems arose more often in revenue recognition, including accounts receivable and deferred revenue, and in accounting for business combinations.

With 39 percent of the audits found to contain deficiencies, BDO improved on its on performance from prior years. The firm’s rate of deficiency exceeded 50 percent every year from 2012 through 2016, rising as high as 74 percent in 2014.

Across major firms, only KPMG has turned out a higher rate of deficiency in 2017 at 50 percent. Grant Thornton delivered a rate of 18 percent, the first one below 20 percent for any major firm since 2009. Deloitte landed at 20 percent and PwC at 24 percent. EY’s 2017 report has not yet been published.