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.