PwC and KPMG audits fall foul of PCAOB

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The US audit regulator has uncovered a series of audit failures during its latest inspections of KPMG and PwC’s US practices

The Public Company Accounting Oversight Board (PCAOB) says that in many of the cases, the firms had failed to gather sufficient appropriate audit evidence to support their audit opinions on the financial statements and on the effectiveness of internal control over financial reporting.

According to the PCAOB's report on PwC, the board found significant deficiencies in 21 of the 52 audits it inspected. In one listed company audit, for example, the firm was found to have insufficiently tested the valuation of two categories of financial instruments that represented a significant portion of the company’s portfolio. Nor had it performed enough tests on controls over the valuation of fixed-maturity investment securities.

In another audit where the client company had completed a number of business combinations during the year, PwC was found to have failed to test the accuracy and completeness of the acquiree’s historical data used in determining the fair value of a significant proportion of the acquired intangible assets and property and equipment.

It also failed to evaluate the reasonableness of certain significant assumptions used in determining the fair values of the acquired assets, apart from asking management and, for one acquisition, the client’s specialist.

The PCAOB also found that the client’s process for recognising the majority of revenue form one significant customer differed from the revenue process for its other customers, and PwC had failed to identify and test any controls over the occurrence of revenue form the significant customer.

Of the 48 audits inspected by the board that KPMG had carried out, 17 were found to be deficient. In one case, despite having identified numerous control deficiencies – including some relating to identified misstatements that exceeded the firm’s established level of materiality, KPMG failed to evaluate sufficiently whether certain of them represented material weaknesses individually, as it failed to evaluate the likelihood and magnitude of the potential misstatements that could result from the deficiencies.

Furthermore, the board found, KPMG failed to evaluate whether some of the control deficiencies, when considered together, collectively resulted in a material weakness.

The PCAOB said that although it had identified deficiencies in the firms’ audits, this did not necessarily indicate the frequency of audit failure throughout the firms’ audit practices.

“Audit work is selected for inspection largely on the basis of an analysis of factors that, in the inspection team’s view, heighten the possibility that auditing deficiencies are present, rather than through a process intended to identify a representative sample,” it stressed.

It also pointed out that as the inspections took place throughout 2012, the fact that a deficiency was included in the report did not necessarily mean that it remained unaddressed.

Julia Irvine

 

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  • Comment by Anonymous

    the practice of accountancy firms starts from the core of their recruitment. for example the answers for the top four firms recruitment exams and questionaires are available on students web rooms where they are shared in secrecy. these students get invited for interviews and end up on training programs. well on their way to become partners at some time in the future.. their integrity was non-existent from day 1... that is the core issue to be addressed.. i can make the questions and answers for the big four available to you just email me. asmailjeff15@gmail.com

  • Comment by Patrick Smith FCA

    A deafening silence from the ICAEW not just in this instance but in the almost weekly occurrence of the Big 4 firms being brought to task by the Regulators. Not so much the elephant in the room as the carcass hanging in the window. Surely time for a blog from Mr Izza on the destruction of brands.

  • Comment by Charles Carling, ex FCA

    The partners are presumably ICAEW members. Have their practising certificates been withdrawn? Have they been disciplined by the FRC? Can we please read about this in Economia?

  • Comment by David Campbell

    Yes - but had these been representative samples of all of the firms' audits, the "error rate" would be a startling 40% of PWC audits and 33% of KPMG audits being shown to be flawed in some way or other. As a former audit partner, I know that the PCAOB will select "sensitive" and "material" audits in their samples, the very audits one would expect the Big 4 firms to take more care on. So all in all, a pretty poor show by these two firms.