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PCAOB Admonishes BDO USA for Quality Control Lapses

Tammy Whitehouse | November 6, 2015

Audit regulators concluded after 2011 and 2012 inspections that BDO USA had some systemic problems with exercising adequate skepticism and conducting its own internal audit reviews.

The Public Company Accounting Oversight Board has republished the firm’s 2011 and 2012 inspection reports to criticize the firm openly for what the board considers an inadequate response to inspection findings in those years around audit quality control problems. The reports say in both years that inspectors found too many cases where auditors too readily accepted management representations without appropriately considering contradictory evidence, contributing to many of the audit failures noted in those reports.

Before recently republishing the reports, the PCAOB’s concerns about the firm’s quality control measures were held private. Under PCAOB rules, audit firms are given 12 months from the time an inspection report is published to address quality control problems to the board’s satisfaction. If a firm fails to meet the board’s expectations, the board can publish the full report with quality control criticisms made public.

BDO attached a statement of its own to the newly published reports acknowledging the PCAOB’s findings and accepting the determination that the initial responses were not sufficient. The firm said it has taken steps to address the areas cited in the reports, including investments in training, tools, and resources. “We continue to develop these and other areas, demonstrating our ongoing commitment to audit quality to our clients, professionals, stakeholders, and the PCAOB,” BDO wrote.

In the PCAOB’s 2011 report, the board notes inspectors found deficiencies in nine audits, and seven of those appeared to be caused at least in part by a lack of professional skepticism. The board says inspectors noted cases where auditors either failed to adequately evaluate the company’s methods or processes for arriving at estimates and assumptions, or failed to adequately evaluate evidence that contradicted management’s conclusions. “These deficiencies occurred even in areas where the firm had identified a risk of fraud,” the PCAOB reports.

The PCAOB also called out the firm’s method for identifying and resolving audit deficiencies internally. The board said the firm self-identified three of the 25 audits selected that year for inspection as unsatisfactory, up from the prior three years when the firm did not self-identify any of its inspected audits as deficient. There is still a big gap, however, in the percentage of audits the firm calls out compared with the percentage of audits the PCAOB inspectors identify as deficient, the report says. “While the firm's process for selecting audits to inspect differs from the PCAOB's inspection process, the implications of this significant disparity need to be carefully considered,” the board wrote.

The PCAOB’s 2012 report indicates inspectors continued to find the same concerns in the subsequent year’s inspection, with auditors failing to show adequate professional skepticism and the firm internally failing to apply adequate skepticism in evaluating its own work. Inspectors also called out the firm for failing to adequately evaluate the work of firm specialists in the course of reviewing its own audit work.

BDO joins Deloitte, EY, KPMG, PwC, and Grant Thornton in having at least two inspection reports republished to expose quality control problems. The board has republished more than 220 such reports since it began performing inspections more than a decade ago.