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E&Y Also Sees Jump in Audit Failures in Latest Report

Tammy Whitehouse | December 22, 2011

Ernst & Young, like other Big 4 counterparts, turned in twice as many deficient audit reports in the most recent year, based on the results of its 2010 inspection report.

The Public Company Accounting Oversight Board has published the latest round of inspection results for all the Big 4 firms, with all of them recording big increases in audit failures over the prior year. Regulators scrutinized 63 Ernst & Young audits and found fault with 13 of them for a failure rate of 20 percent. That's a big increase over the 8.6-percent failure rate in the firm's 2009 inspection report, but still lower than rates seen with other Big 4 firms. The PCAOB found fault with 45 percent of the audits it studied at Deloitte, 39 percent at PwC, and 22 percent at KPMG.

At Ernst & Young, the PCAOB said it found seven audits with deficiencies in the testing of fair value measurements and disclosures around financial instruments that couldn't be indexed readily to market indicators. The inspectors said auditors didn't go far enough to understand the valuation methods or assumptions used by management. In the remaining audits, inspectors said audits suffered from various problems, including inadequate scrutiny of internal controls, inventory valuation, impairments, debt agreements, revenue recognition, allowances for loan losses, and valuation of investment securities.

In the firm's written response attached to the inspection report, Ernst & Young says it doesn't agree with the specific characterizations of the work performed in all cases cited by inspectors. “On an overall basis, we do agree with certain findings in the report and where applicable have taken actions to address such finding,” the firm wrote.

The firm calls out a few specific audits criticized for problems with fair value measurements: “We believe the totality of the audit work performed on these engagements permitted us to conclude, with reasonable assurance, that we obtained sufficient appropriate audit evidence to support our opinions,” the firm wrote. Neverthless, the firm has updated its internal guidance as a result of the issues raised in the inspection report, the letter said, and that guidance will be effective for the next auditing cycle.