Why the Big Four Are Still a Big Mystery

Critics say the PCAOB's latest round of inspection reports are too vague and released one year too late to tell the public what kind of job the large audit firms are doing.

In its letter, E&Y also said it had conducted additional procedures in light of the PCAOB’s findings but did not redo any of its audit opinions. “The inspection process provides us insights as to how to make our audit work even better,” the firm said in a prepared statement sent to CFO.com. “We constantly reexamine and improve our audit policies and processes, and we will continue to work closely with the PCAOB to use its findings to refine and further improve our audits.”

Similarly, documentation was an issue noted by the PCAOB in its reports of Deloitte’s 2004 audits. The 11 instances in which the board’s inspectors noted the firm failed to provide “sufficient competent evidential matter to support its opinion” were deemed sufficient based on the firm’s understanding of the PCAOB’s stance, the firm noted: “The board’s standards provide that the nature and extent of documentation are determined using the auditor’s judgment.” Still, Deloitte supplemented its working papers for seven of the issuer audits after reading the inspection report. In response to the PCAOB’s previous year’s report on the firm, Deloitte noted: “It is important that the emphasis on documentation does not come at the expense of improvement in the substance of the audit process.” Deloitte did not return CFO.com’s requests for comment.

At first glance, the PCAOB’s demands for documentation might seem ironic, given the heavy criticism that companies have leveled at auditors for indiscriminately demanding documentation for internal-control audits. That problem, blamed in large part on the PCAOB’s Auditing Standard No. 2, became so controversial that the board announced plans to replace AS2 with a less-prescriptive standard. To be fair, however, observers note that there’s a big difference between an audit and an audit inspection. “If it’s not documented, how does the PCAOB know it was done?” asks Mulford.

The recent batch of Big Four reports raises another question as well: Are they worth the trouble? “Is this process really helping to improve the quality of the audit?” asks H. David Sherman, an accounting professor at Northeastern University and a former accounting fellow in the Securities and Exchange Commission’s corporate finance division. “So many of the things they find are really kind of marginal.”

The onus is on the PCAOB to find some type of error, says Mulford. Adds Cook, “I’d be very troubled if they put out a report saying they had gone to all these offices and looked at all these engagements and said, ‘We didn’t find anything that they didn’t do right.’”

The PCAOB has reported in a number of cases that its inspections did not turn up any errors, says Niemeier. But that’s an unlikely result for the Big Four. “It would be unrealistic to expect a day when neither the PCAOB nor the firms themselves find audit risks that merit attention on a going-forward basis,” he says.


Your email address will not be published. Required fields are marked *