KPMG Gets Inspected; PCAOB News; More

KPMG has become the latest major audit firm to take heat from the Public Company Accounting Oversight Board over a handful of audit missteps.

In its annual inspection, the PCAOB visited KPMG’s national office and 24 of its 90 U.S. field offices to pore over audit files looking for errors. Inspectors picked apart 10 audits in particular where they found problems that suggest the firm “had not obtained sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

The deficiencies included not only inadequate audit procedures (in the eyes of PCAOB inspectors, at least) but also undiscovered accounting mistakes. KPMG spokesman Dan Ginsburg says the firm conducted a thorough review of issues raised by inspectors and performed some additional procedures and documentation where warranted. None of those matters resulted in a restatement or having to reissue any of our reports, he notes.

The firm also stressed that not every point raised by inspectors led to new work. “In [some] cases, we determined that no remediation of any type was necessary,” KPMG wrote to the PCAOB in response to the inspection.

In its letter, KPMG acknowledges the inspection process and its role in improving audit quality, but the firm also defends its own staff. “We would also like to recognize the people of KPMG and the effort they expend to perform high-quality audits in an increasingly challenging environment,” noted KPMG.

The PCAOB’s comments focused on some touchy accounting and auditing topics, such as allowances for loan losses, questionable revenue recognition tactics, write-downs associated with long-lived assets, goodwill in a business combination, and others. In some cases, inspectors say the firm failed to test claims, data, or assumptions, while in others inspectors say auditors failed to document their conclusions adequately.

“Just as auditors use their judgment to determine the auditing procedures to be performed, the PCAOB inspection staff members’ observations are based upon their assessment of audit risk and financial statement materiality,” KPMG wrote. “We may have differing views as to the nature and extent of necessary auditing procedures, resulting conclusions, or required documentation in specific circumstances.”

The report covers audits of 2006 financial statements, studied by PCAOB inspectors from April 2007 through January 2008. It is the last report for that period to be published on a Big 4 or tier-two audit firm.

GAO, PBGC Spar Over Pension Fund Oversight

Government agencies are stuck in a disagreement over how much oversight is necessary to protect $68 billion in invested assets and fix a $14 billion deficit.

The Government Accountability Office says the board of the Pension Benefit Guaranty Corp. isn’t adequately overseeing implementation of the investment policy for the PBGC’s $68 billion in invested funds, especially considering the staff of the PBGC took a detour from the stated investment policy to try to improve the PBGC’s overall financial condition.

The PBGC is the government bailout agency for failed private pension plans, protecting retirement funds for more than 44 million Americans. The board of the PBGC—comprised of the secretaries of Commerce, Labor, and Treasury—undertook a biennial review of PBGC’s investment policy for the first time in 2004. At that time, the board instructed PBGC staff to limit exposure to financial risk by reducing equity holdings to a range of 15 to 25 percent of total investments, according to the GAO.

By 2008, that policy goal had not been attained, with the PBGC staff reporting that high equity returns and low fixed-income returns made it difficult to reach the target allocation and that flexibility in the policy provided latitude to veer from the stated course to improve the overall financial condition. “While PBGC’s director and staff kept the board apprised of its investment performance and asset allocation, the GAO found no indication that the board had approved the deviation from its established policy or expected PBGC to continue to reduce the proportion of equities to meet the policy objectives,” the GAO wrote in its recently published report.

The PBGC says it is reviewing the GAO’s recommendations, which include improvements to how the board monitors achievement of investment policy goals and additional analysis of the new investment policy. “We do not believe that a system of verbal agreement and informal guidance is strong enough oversight for investing $68 billion,” the GAO wrote. “The successful implementation of this policy, which invests in a broader range of assets, will require close monitoring and consistent oversight.”

Chao

So far, the PBGC’s board is standing its ground. Labor Secretary Elaine Chao, who chairs the board, said in her response to the GAO findings: “The Board believes that the presentations by the PBGC and verbal agreement and informal guidance by the Board and the Board Representatives to the PBGC is appropriate oversight.”

PCAOB Offers Forums for Smaller Public Companies

For directors and finance staff of smaller public companies, the Public Company Accounting Oversight Board is planning a new forum agenda to cover the latest developments in audit regulation.

As part of the series of forums on auditing in small-business settings, the PCAOB will provide staff updates on current accounting and auditing issues, auditing standard-setting activities, inspection activities, and observations. Staff from the Securities and Exchange Commission’s Division of Corporation Finance also will discuss common financial reporting pitfalls related to smaller companies, including observations related to reporting on internal control over financial reporting.

The agenda also will include an update on the latest trends in workplace ethics and compliance. The small business series typically targets audit firms working in smaller business settings, but the two break-out sessions target company executives specifically. They are held Oct. 1 in Chicago and Oct. 31 in Philadelphia. The program is free, but registration is required.

Survey: CFOs Not Eager to Switch to IFRS

CFOs would appear a bit cool to the idea of adopting International Financial Reporting Standards, but believe they can do so quickly if allowed or required to do so, according to a recent economic outlook survey.

A recent poll by Financial Executives International and Baruch College of more than 200 corporate CFOs found that less than 20 percent of CFOs said they would take advantage of an opportunity if provided to file or prepare financial statements using International Financial Reporting Standards. If their companies decided to switch or were required to switch, however, nearly half said the job could be done in only two to three years.

The Securities and Exchange Commission is widely expected to provide such an option or perhaps even mandate a switch to IFRS for public companies at some point in the future. Cheryl Graziano, vice president of the Financial Executives Research Foundation, an affiliate of FEI, says the CFOs participating in the survey represent both public and private companies, which might explain why a low number are eager to jump at the chance to use IFRS.

Public companies with international operations, which may already be reporting under IFRS, are expected to be most amenable to a change in reporting platforms because of its potential to streamline accounting processes.

“I don’t know that I would take it as a lukewarm response because of the demographics,” Graziano says. She figures about 75 percent of the CFOs participating in the survey represented private companies. “People are contemplating making the change and putting processes in place, but it’s wait and see.”