Initial reviews of the nation's largest accounting firms have turned up numerous rule violations and shoddy recordkeeping practices, as regulators embarked on a new effort to regularly examine auditors' work.
The inspections mark the first independent scrutiny of the so-called Big Four firms, which had previously operated under more than 70 years of self rule. Congress mandated the examinations in a 2002 law designed to clean up the troubled accounting industry. Accountants' lax reviews and overly cozy relationships with clients have been blamed for fueling corporate scandals that wiped out billions in investments in the past few years.
William J. McDonough, chairman of the oversight board, said the findings show a need for monitors.
(Evan Vucci -- AP)
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Each of the biggest audit firms -- Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP -- has presided over at least one recent accounting blowup. A fifth, Arthur Andersen LLP, collapsed two years ago after being convicted of obstructing justice related to its work for Enron Corp.
Inspectors at the congressionally created Public Company Accounting Oversight Board fanned out across the country last year to examine a small sample of the Big Four's audits. Portions of their findings, which cite lapses in accounting rules and failures to preserve documents that back up auditors' work, were released to the public yesterday.
Board officials cautioned that the reports should not be considered a widespread "negative assessment" of the Big Four's audits. Together, the four firms review the books of more than 10,000 publicly traded companies. Inspectors stressed yesterday that they had reviewed fewer than 100 audits between June and December 2003.
"Our findings say more about the benefits of the robust, independent inspection process . . . than they do about any infirmities in these firms' audit practices," Chairman William J. McDonough said.
McDonough said the results of the inspections underscore the need for independent oversight of the accounting profession. "When Congress created the PCAOB . . . they did a very wise thing," McDonough said in an afternoon conference call.
Accounting scholars and industry experts who read the reports said they were surprised at their thoroughness, especially because board inspectors were operating at bare-bones staffing levels at the time.
"This is a clear signal from the accounting board that it is not business as usual," said Charles W. Mulford, an accounting professor at the Georgia Institute of Technology. "They found a lot with these audits and this report says, I think, there is a lot more to find."
Donald T. Nicolaisen, the Securities and Exchange Commission's chief accountant, said he was disappointed with the number of problems cited in the reports. He noted that the inspections were conducted at a time when firms were adapting to a new regulatory regime.
