PCAOB Gives Better Grades to BDO Seidman

The PCAOB's third report on BDO Seidman is the first not to find errors that could be material to the audit firm's clients, but nonetheless notes 11 instances where testing or paperwork was inadequate.

The Public Company Accounting Oversight Board released its third inspection report on BDO Seidman on Wednesday, and noted several instances where the audit firm failed to show evidence that it had done proper testing during its 2005 audits.

The PCAOB listed 11 instances of significant audit deficiencies, which includes times the firm did not identify or address errors in its clients’ use of generally accepted accounting principles. For the audits of seven of those clients, BDO Seidman should have done more testing or evaluations to support its audit opinion, the regulator concluded.

To be sure, this report marks the first time the PCAOB did not find errors that could be material to an issuer’s financial statement in its inspections of BDO. In its 2005 report released last November, for example, the PCAOB noted one case where the audit firm’s client needed to issue a restatement.

Using anonymous names for each issuer, the PCAOB listed several faults with BDO’s 2005 audits. For instance, BDO auditors relied too heavily on their discussions with management for evaluating Issuer C’s disclosures related to damages from a natural disaster. The PCAOB noted another time where BDO apparently relied too much on another person when its auditors trusted an external valuation specialist’s determination of the value of intangible assets and research and development of a foreign company the issuer had acquired. “There was no evidence in the audit documentation, and no persuasive other evidence, that the Firm had made appropriate tests of this information,” the PCAOB wrote.

In another case, the regulator found fault with BDO for not properly assessing whether revenue had been recorded in the proper period. The firm did not show evidence that it had performed revenue cut-off procedures at year end, the PCAOB noted.

In its response to the report, BDO Seidman said none of the PCAOB’s findings triggered a change to its audit opinions. The firm supplemented some of its documentation and preformed additional procedures. One paragraph of its letter has been redacted by the PCAOB.

Beyond those notes, BDO Seidman’s March 2, 2007, letter — included at the end of the PCAOB report — is nearly identical to the ones it sent to the PCAOB for the previous years’ inspection reports. Again, BDO Seidman seemed to chalk up the scrutiny of its documentation to interpretation. Documentation is important, but it is “one of the more difficult areas in which to reach a common understanding of what is sufficient because of the variety of judgments involved,” BDO Seidman wrote. The letter is not attributed to a particular BDO employee.

As it had in previous years, BDO took issue with the set-up of the PCAOB report. “The format of the report…does not lend itself to a portrayal of the overall high quality of our audit practice,” BDO Seidman wrote, adding that the engagements the PCAOB reviewed involved hundreds of decisions open to many interpretations.

Indeed, the PCAOB reports do highlight only its negative conclusions as a way to “focus firms on areas where they can improve,” as PCAOB board member Charles Niemeier told CFO.com last year. In its reports, the board notes that the number of audits the inspectors review is a small portion of the total number conducted by each firm. However, the PCAOB will not release the total number of audits it conducts each year for each firm. The regulator discourages the public from drawing any conclusions based on the number of audit deficiencies listed in the report.

The PCAOB, which oversees the auditing profession, conducted inspections of BDO Seidman from May to December of last year. The inspection team performed its work at the New York City and Chicago national offices as well as eight of its 22 practice offices.

As CFO.com reported earlier this year, one of BDO’s former issuers recently disputed the PCAOB’s inspection of the audit firm. Presstek, a print-technology company, delayed filing its 2006 annual report because the PCAOB had disagreed with how Presstek accounted for certain new-product costs in fiscal 2005. The PCAOB made this criticism after a routine inspection of BDO.

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