The Public Company Accounting Oversight Board’s 2006 inspection of auditor Crowe Chizek notes deficiencies in the audits of three of the firm’s clients. The report, released late last week, reflects a contrast of the second-tier firm’s performance compared to its larger brethren.
Examining the audits of Crowe’s headquarters and four of its 19 field offices, the report is shorter than the PCAOB’s two previous reports on the firm, and notes far fewer significant deficiencies. The 2004 and 2005 reports recorded several audit deficiencies at 19 clients. However, in this most recent report, the PCAOB largely faults Crowe for not providing enough evidence to back up its audit opinions at a trio of issuers.
Meanwhile, Big Four firms didn’t fair as well as Crowe. KPMG’s most recent report cited 14 audit deficiencies at seven of the auditor’s clients, and Deloitte was faulted for its work on eight of its clients. The PCAOB has not yet released its 2006 reports on PricewaterhouseCoopers and Ernst & Young.
Comparing Crowe’s 2006 PCAOB report to those auditors of similar size, mid-tier firm BDO Seidman was cited for 11 deficiencies in its 2005 audits, and Grant Thornton was cited for several deficiencies at eight of its clients. However, the PCAOB noted only four instances in which McGladrey & Pullen did not show that its auditors had performed procedures to support an audit opinion for one company.
To be sure, the PCAOB frowns upon readers of its inspections reports drawing any conclusions based on the number of deficiencies or issuers noted. The nonprofit, governmental organization says its audits are risk-based, meaning that the board does not randomly pull audits it decides to review. Rather the board selects audits that it perceives as having difficult issues, and therefore a higher risk of deficiencies.
Indeed, one of the audits reviewed at Crowe involved FAS 133, which as the auditor comments has led to restatements at several companies. In fact, the issuer restated two quarters’ worth of financial results based improper hedge accounting. In this case, Crowe had determined that the company’s use of the so-called short cut method of fair-value hedge accounting under FAS 133 was inappropriate — a common conclusion in many of the examples written up in PCAOB reports.
While Crowe confirmed that the issuer had made quarterly assessments related to the effectiveness of hedging relationships, the auditor had no proof to show the PCAOB that it had conducted similar tests when those relationships were formed.
The PCAOB also lists instances in which Crowe did not properly test a third party’s valuation assertions for available-for-sale securities, and failed to show that it had addressed contradictory information in an issuer’s schedule for the exercise prices of stock options.
Crowe defended itself in an August 28 letter, which was included in the inspection report. For the matter of the stock-option schedules, the auditor found the differences in information immaterial and said they involved just a small number of shares. Using the same language as in its previous letters to the PCAOB, Crowe also wrote, “We recognize that inspection comments can reflect differences between professional judgments we made … and those made by board inspectors …. Many of these involve materiality assessments or the nature and extent of audit documentation.”