Big Four audit concerns raised following inspection

Link: Big Four work slammed by PCAOB

The US Public Company Accounting Oversight Board undertook limited inspections of Deloitte, KPMG, PricewaterhouseCoopers and Ernst & Young. The review looked at compliance and quality control within the firms, as well as examining a selection of audits undertaken by them in the US. The board found faults in each of the firms’ work.

In particular, the Big Four struggled for compliance with the provisions of Emerging Issues Task Force 95-22, which deal with outstanding borrowings under revolving credit agreements.

In several audits, such debts had been classified as long-term liabilities, when in fact they should have been identified as current liabilities. The misclassification led auditors to understate current liabilities and overstate working capital.

E&Y was forced to admit that departure from PCAOB standards and its own quality-control processes resulted in ‘material deficiencies’ in the audit of one client. This was partly down to an over-reliance on the work of the internal audit department.

The investigation of Deloitte found certain business agreements with an audit client that raised questions over whether the firm had complied with independence requirements. Deloitte initially said it was unaware these business affiliations existed. The firm ultimately acknowledged that some of the agreements included inappropriate language, but claims it did not violate independence rules.

KPMG was found to have 14 further issues of deviation from US GAAP and several departures from PCAOB standards. Although the GAAP exceptions were judged to be immaterial, KPMG had to alter its procedures to fit in with the board’s standards for audit work.

Although PwC deviated little from established GAAP, the board identified numerous deficiencies in adhering to PCAOB standards and its own policies.

These included the failure to properly record misstatements in excess of the documented de minimus threshold, using non-statistical audit sampling, and failing to archive electronic work papers within the time period required.

Big Four firms accepted the criticisms where they arose and changed working practice where necessary to avoid such instances occurring again.

‘None of our findings has shaken our belief that these firms are capable of the highest quality auditing,’ said William McDonough, chairman of the PCAOB. ‘The board is also encouraged by the firms’ demonstrably cooperative attitude toward our inspections.’

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