PCAOB Finds 'Significant’ Issues in Review of Big 4 Audits
When it comes to the quality of work by Big Four accounting firms, "there's room for improvement," according to the chairman of the Public Company Accounting Oversight Board.
PCAOB Chairman William McDonough told lawmakers Thursday that limited reviews conducted last year of corporate audits found "significant" auditing and accounting issues.
"We found some situations where their issuing clients, in the engagements we looked at, did not appear to follow" Generally Accepted Accounting Principles, McDonough said, according to Reuters. U.S. public corporations must follow GAAP, and violations can lead to enforcement action.
The Big Four firms volunteered for the inspections in 2003. The oversight board reviewed work for 16 different high-risk corporate audit clients for each of the firms, and McDonough said the results revealed "a great deal about quality control," the Wall Street Journal reported. He would not talk specifically about individual firms or provide much detail during his testimony at the House of Representatives Capital Markets Subcommittee.
Investors will get more detail in August, when edited versions of the reports are posted on the PCAOB website at www.pcaobus.org. The Big Four firms received draft reports earlier this week and have 30 days to respond. Final reports go to the Securities and Exchange Commission and state regulators as appropriate, McDonough told reporters after the hearing.
He added that he thinks the results indicate the Sarbanes-Oxley Act, which created the PCAOB, "is a good thing."
The Sarbanes-Oxley Act requires the board to review and discipline accounting firms that audit public companies. The board must examine large accounting firms every year and smaller firms once every three years, or more often. Violations of U.S. securities laws or auditing standards could result in fines or a ban from auditing public companies.
The PCAOB's plan for 2004 is to examine 5 percent of audits by the Big Four and 15 percent of audits by the next four biggest firms: Grant Thornton, BDO Seidman, Crowe Chizek & Co. and McGladrey & Pullen, McDonough said. He said the PCAOB will review about 650 audits this year.
He also said the PCAOB will hold a July 14 forum on tax services, moving the panel closer to tackling corporate tax shelters — a controversial issue that has led to federal probes of past tax shelter promotions by Ernst & Young and KPMG.
Look forward, not backward
David,
It seems you have a lot of complaints but no solutions. What do you propose as a fix and how would you implement it?
ACCOUNTING IS NO LONGER PROFESSIONAL
The accounting "profession", led by the Big 4 and AICPA have ceased to be professionals. They allow the clients to dictate what they will pay for audits, which thereby limits the work done to that fee limit. We should be telling the clients what is required, and how much the PROFESSIONAL SERVICE will cost.
No one goes to a doctor, hospital, attorney, auto mechanic, or anyone else and tells them to limit their work to a certain amount regardless of what is needed. Can you imagine anyone telling the doctor to just examine the right side; or telling a surgeon or hospital that the operation must be done in 2 hours or less; or the auto mechanic to check the engine but not the transmission, etc. ?
But that's what "we" do. And firms undercut each other's fees to get the client, regardless of the work required, or by using inexperienced staff that is really unqualified for the work to be done. And the manager/supervisor/partner time is forced onto jobs to get them "chargeable" time to make their productivity look good, thereby reducing the time/cost available for the staff working on the job. Rarely are audits adequately planned as far as required personnel time at each level and the related fee which is then quoted and kept without "discount" or adjustment. Our "profession" is the only one with "realization" consistently in the 60-70% range.
The AICPA and the Big 4 deserve the bad press and lawsuits from many of the engagements that have been in the papers. Ironically, World Com, Enron, etc. may not have been their fault because of the fraud, but most others are the result of fiting the work to the fee.
The AICPA sold us out in recent years with its divergence to Global Credidation, CBIZ (?), Life Insurance, and other business ventures, while forgetting the professionalism they were supposed to be the proponent of.
Now I can get down from my soapbox. After 40 years, I quit the AICPA a couple of years ago when all of the above came to a head, with no public support from the AICPA. We needed "Little GAAP" for years, but the AICPA refused to listen.