The Public Company Accounting Oversight Board found fault with seven of the 16 audits inspected at McGladrey in 2012, a slight improvement for the firm over the eight-of-16 failed audits in the 2011 inspection cycle.
Inspectors called out only one audit at McGladrey that was deficient in its audit of internal control over financial reporting, a departure from the much higher instances at other firms where inspectors have flagged problems in complying with Auditing Standard No. 5. Four of the seven failed audits at McGladrey showed problems in the audit of fair value measurements, and inspectors found four instances where the firm failed to meet standards for audit evidence. Only two audits demonstrated problems with auditing accounting estimates.
McGladrey's letter to the PCAOB indicates the firm followed up on matters identified in the inspection and took appropriate actions to address the findings. Neither the letter nor the report indicates any of the inspection findings led to any changes in audit conclusions or restatements. “McGladrey is committed to using the inspection comments and observations to improve our system of quality control,” the firm wrote.
The PCAOB cautions against extrapolating failure rates based on the number of audits inspected and the number where inspectors found problems. “Due to the selection process, the deficiencies included in this report are not necessarily representative of the firm's issuer audit practice,” the PCAOB wrote in its report. The PCAOB uses a risk-based approach to select audits for inspection, searching for those audits where problems are most likely to be found.
McGladrey is the final firm among the Big Four and second-tier firms to see its 2012 inspection report made public. In all, Deloitte turned in the lowest failure rate of the year at 25 percent followed by KPMG at 34 percent and PwC at 39 percent. McGladrey was next at 44 percent. Grant Thornton recorded the highest rate at 65 percent. BDO USA reached 55 percent, Crowe Horwath broke even at 50 percent, and EY fell at 48 percent.
Only three firms turned in better inspection results in 2012 over 2011, with Deloitte showing the biggest improvement, from 42 percent to 25 percent. McGladrey's improved slightly, and Crowe Horwath reduced its rate from 62 percent in 2011 to 50 percent in 2012.