In the latest batch of inspection reports, it has found serious deficiencies in audits carried out by PwC Canada and KPMG Switzerland.
In PwC’s case, the PCAOB inspectors reviewed portions of seven audits the firm had carried out of the financial statements of companies listed in the US. They also looked at work the firm had done on another audit of which it was not the principal auditor.
In four of the audits, the inspectors came across deficiencies “of such significance” that, at the time PwC issued its audit report, it appeared the auditors had not “obtained sufficient appropriate audit evidence to support [their] opinion that the financial statements were presented fairly, in all material respects, in accordance with the applicable financial reporting framework and/or [their] opinion about whether the issuer had maintained, in all material respects, effective internal control over financial reporting (ICFR)”.
In other words, the inspectors say, PwC issued an opinion without satisfying its fundamental obligation to obtain reasonable assurance about whether the financial statements were free of material misstatement and/or the issuer maintained effective ICFR.
The deficiencies all related to the firm’s failure to perform sufficient procedures to test aspects of the financial statement, such as the design and operating effectiveness of controls over the valuation of property, plant and equipment or mining interests, valuation of intangible assets and the occurrence and completeness of revenue.
In KPMG’s case, the inspectors reviewed portions of one issuer audit and the firm’s work on two others where it was not the principal auditor.
Once again, they found deficiencies “of such significance” in one audit that it appeared the auditors had issued an opinion without satisfying their fundamental obligation to obtain reasonable assurance about whether the financial statements were free of material misstatement and/or the issuer maintained effective ICFR.
The firm had failed to perform sufficient procedures to test the valuation of a liability for uncertain tax positions. It had also failed to test the design and operating effectiveness of controls over the occurrence, completeness and allocation of revenue, during an audit of ICFR.
The inspectors point out in both cases that even though the deficiencies are significant, they do not necessarily mean that the financial statements are materially misstated or that there are undisclosed material weaknesses in ICFR.
However, they regard the auditors’ failure to obtain the reasonable assurance necessary as a serious matter. “It is a failure to accomplish the essential purpose of the audit, and it means that, based on the audit work performed, the audit opinion should not have been issued,” they say.
In a letter to the PCAOB in response to the report, PwC Canada said that bringing value to the capital markets by consistently performing high quality audit remained the firm’s top priority.
“In this regard,” they add, “we recognise the value of the inspection process and have taken the PCAOB’s observations into account in formulating our various actions to continuously improve audit quality.”
KPMG also said it took the PCAOB findings very seriously and had taken appropriate actions to remedy the deficiencies.
“We understand our responsibility to investors and other participants in the capital markets and are committed to continually improving our processes and controls and working constructively with the PCAOB to improve audit quality and build confidence in the auditing profession.”
In both cases, the audits were carried out in 2015 and inspected in 2016.