29 Aug 2013 06:05pm

PwC and KPMG audits fall foul of PCAOB

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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