PCAOB Eviscerates Deloitte

By Cydney Posner

This article from The New York Times reports on the PCAOB's "unprecedented rebuke to a major accounting firm."  The report charged that Deloitte "placed too much faith in officials of the companies being audited.

" 'In too many instances," the report stated, inspectors from the board ‘observed that the engagements team's support for significant areas of the audit consisted of management's views or the results of inquiries of management.'" The article reports that, in "some cases, Deloitte auditors did not bother to even consider whether accounting decisions made by companies were consistent with accounting rules. Instead, auditors accepted management assertions that the accounting was proper, the board's report said." The report attributed these problems to a firm culture that " 'allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis and collection of objective evidence, and that rely largely on management representations.' "

Not surprisingly, Deloitte disputed the PCAOB's conclusions, arguing that it mischaracterizes Deloitte's practices and quality control, and rejected second-guessing by the PCAOB of Deloitte's "reasonable judgments." The CEO of Deloitte contended that they have made significant investment in all of the areas mentioned in the report. Although he is confident in the quality of their audits, there "'were, and always will be, areas in which we can improve.'"

The article reports that problems were cited in 27 of the 61 Deloitte audits reviewed, including three where restatements were required. According to the article, "[i]n each of the cases where the accounting had to be changed, the board said Deloitte auditors had failed to consult with the firm's top experts to determine appropriate accounting policies. It said there was ‘cause for concern' that the firm's policies did not result in appropriate consultations." In addition, the PCAOB chastised Deloitte for failing to properly assess whether personnel of foreign affiliates engaged to help on audits of multinational companies were adequately familiar with U.S. accounting and auditing rules. It is not known if the PCAOB has taken action against Deloitte or any of its partners.

Surprisingly, the report was written in 2008, covering audits conducted in 2007, but not released until now; apparently, it "was kept private under rules that say such criticisms must remain confidential for a year, and then may be released only if the firm has failed to make sufficient progress in correcting the problems.…That the board decided to release the report is an indication that those procedures did not change enough to satisfy the board, at least within the following year." The PCAOB's 2010 regular report on Deloitte cited problems with 15 audits, according to the article, "including some where it said the audit firm had failed to do work needed to assess whether management assertions were correct. The quality control portion of that report was kept confidential."

The article notes that this is the first time that the PCAOB has ever released this type of report on a major firm. However, the article reports that the PCAOB is growing "increasingly critical recently of the failure of the major firms to improve," and each year, according to PCAOB Chairman Jim Doty, more audit failures are found: " ‘I am left,' [Doty] said, ‘with the inescapable question whether the root of the problem is auditor skepticism, coming to ground in the bedrock of independence. The loss of independence destroys skepticism.'"