The Public Company Accounting Oversight Board found fault with nearly half the audits inspected at McGladrey in 2014, according to the firm’s latest inspection report.
In inspections performed in 2014 on 2013 financial statements, the PCAOB called out seven of the 15 audits they studied as failing to meet auditing standards. Only two of the seven faulty audits exhibited problems in both the financial statement audit and the audit of internal control over financial reporting, the report says. Of the remaining five, three had problems just in the financial statement audit, and two had problems just in the audit of internal control.
Across all the audits with deficiencies, the PCAOB noted 10 separate instances where auditors failed to comply with Auditing Standard No. 5, which governs the internal control audit. Inspectors flagged four separate ways auditors did not properly respond to risks of material misstatement, which is explained in AS 13, and then only one or two problems each with evaluating audit results, audit evidence, auditing fair value measurements and disclosures, confirmations, inventory, and auditing accounting estimates.
One particularly problematic audit for McGladrey involving failures in auditing inventory led to six separate violations of auditing standards. The majority of the firm’s audit mistakes occurred in auditing entities in financial services and health care.
The 47-percent rate of audit deficiency across 15 inspected audits represents an increase over the prior year’s result for McGladrey. In its 2013 report published in 2014, inspectors flagged only 31 percent, or four of 13 audits scrutinized.
McGladrey’s latest report also represents the highest problem rate for any of the annually inspected firms whose reports have been published so far in 2015. EY reached 36 percent in 2014, followed by PwC at 29 percent and Deloitte at 21 percent. It’s also the only firm to show a higher rate of deficiency in its latest report over the year before.
In its written response to the inspection report, McGladrey said it evaluated the findings and took appropriate steps in accordance with PCAOB standards and the firm’s policies. “We support the PCAOB’s inspection process and believe that it helps us enhance the quality of audit engagements,” the firm wrote. The firm had no further comment beyond its letter contained in the report.