Reviewing the PCAOB's Report on Deloitte

Thursday, May 13, 2010 , , 2 Comments

 pic credit: toothpaste for dinner

Professor Albrecht does it over at The Summa and does not use any F words. I commend him for that, I said a few while reading.

The PCAOB's esteemed inspection report on Deloitte does not impress but isn't that what you'd expect?

Most importantly, the PCAOB does not intend to second guess any of Deloitte’s audit opinions.  For its part, Deloitte says that these did not produce any erroneous audit opinions (but then, what do you expect them to say).

So, is this report good news for Deloitte?  I think so.  The errors cited are not alarming for the most part.  Also, we are given no indication as to how frequently these errors occur.  Near the end, three catch my eye and would concern me if they routinely occur in Deloitte audits:
Issuer M  The Firm failed to perform adequate audit procedures to test the fair value of an embedded derivative liability at year end.
Issuer N  The Firm failed to sufficiently test revenue and cost of goods sold.
Issuer O  The Firm failed to identify a departure from GAAP that it should have identified and addressed before issuing its audit report.
But, we have no way of knowing how frequently these errors occur.

This is a major deficiency of the enabling legislation, the Sarbanes-Oxley Act of 2002.  It does not call for the type of inspections that could do financial statement users any good (a big reason why Congress should write financial or regulatory legislation).  The focus on is improving audit firms and their opinions, and not on helping investors to assess the relative effectiveness of those audits.  For that we must rely on an evaluation of audit firm litigation.  Unfortunately, there are so many confounding variables that assessing audit quality through litigation is very problematic.

The takeaway from his post is this (in my view): The PCAOB is far more concerned with appearing as though it is useful than actually being useful. I can understand auditor error, after all, they are human. But Issuer N with the CoGS completely disregarded in testing is absolutely disturbing (does it say how auditors left this out? Was it planned but not implemented? Where was the breakdown so the audit firm can address the deficiency? Isn't that what the PCAOB is supposed to do?) .

Busywork. More checkboxes for checkboxes. Very little useful information. Nothing shocking here.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


profalbrecht said...

Great post, Adrienne.

Yeah, PCAOB inspections leave a lot to be desired. I wish the PCAOB was charged with conducting police-type inspections, and with the power to file charges against any auditor offenses it uncovers.

profalbrecht said...

Am looking it over, and I omitted an important word. Congress should NOT write financial or regulatory information, they invariably get it wrong.

Would you want Congress to perform a medical procedure on you? Of course not. Then why should congress perform a financial procedure.

Having said that, I recognize that sometimes a Senator can get something right, even if by accident. I've heard it said that if you let a monkey bang away on a typewriter, then eventually it might turn out something as wonderful as Shakespeare. Let Congress bang away at passing laws, and eventually it hits on something good.