The PCAOB's Concept Release on the Audit Reporting Model

all of the materials surrounding their decision processes

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  • Robert E Jensen

    A December 21, 2011 WSJ Article on Those Startling Deloitte Audits That Are Beginning to Remind Us of Those Sorry Andersen Audits
    "Accounting Board Finds Faults in Deloitte Audits," by Michael Rapaport, The Wall Street Journal, December 21, 2011 ---
    http://online.wsj.com/article/SB10001424052970204879004577110922981822832.html

    Inspectors for the government's audit-oversight board found deficiencies in 26 audits conducted by Deloitte & Touche LLP in its annual inspection of the Big Four accounting firm.

    The report from the Public Company Accounting Oversight Board, released Tuesday, said some of the deficiencies it found in its 2010 inspection of Deloitte's audits were significant enough that it appeared the firm didn't obtain enough evidence to support its audit opinions.

    The 26 deficient audits found were out of 58 Deloitte audits and partial audits reviewed by PCAOB inspectors. The inspectors found that, in various audits, Deloitte didn't do enough testing on issues like inventory, revenue recognition, goodwill impairment and fair value, among other areas. In one case, follow-up between Deloitte and the audit client led to a change in the client's accounting, according to the report.

    The board didn't identify the companies involved, in accordance with its typical practice.

    The report is the first PCAOB assessment of Deloitte's performance issued since the board rebuked Deloitte in October by unsealing previously confidential criticisms of the firm's quality control.

    Deloitte said in a statement that it is "committed to the highest standards of audit quality" and has taken steps to address both the PCAOB's findings on the firm's individual audits and the board's broader observations on Deloitte's quality control and audit quality. The firm said it has been making a series of investments "focused on strengthening and improving our practice."

    Last month, the board released its annual reports on PricewaterhouseCoopers LLP, in which it found 28 deficient audits out of 75 reviewed, and KPMG LLP, in which it found 12 deficient audits out of 54 reviewed. The yearly report on the fourth Big Four firm, Ernst & Young LLP, hasn't yet been issued.

    The PCAOB conducts annual inspections of the biggest accounting firms in which it scrutinizes a sample of each firm's audits to evaluate their performance and compliance with auditing standards. The first part of the report is released publicly, but a second part, in which the board evaluates the firm's quality controls, remains confidential as long as the firm resolves any criticisms to the board's satisfaction within a year.

    Only if that doesn't happen does the PCAOB release that section of the report, as it did with Deloitte in October, the first time it had done so with one of the Big Four. In that case, the board made public a section of a 2008 inspection report in which it said Deloitte auditors were too willing to accept the word of clients' management and that "important issues may exist" regarding the firm's procedures to ensure thorough and skeptical audits.

    "At Deloitte, More Pain Before Any Quality Gain," by Francine McKenna, re"TheAuditors, November 30, 2011 ---
    http://retheauditors.com/2011/11/30/at-deloitte-more-pain-before-any-quality-gain/

    Bob Jensen's threads on Deloitte and the Other Large Auditing Firms ---
    http://www.trinity.edu/rjensen/Fraud001.htm

    Bob Jensen's threads on professionalism and independence in auditing ---
    http://www.trinity.edu/rjensen/Fraud001c.htm

  • Robert E Jensen

    "PCAOB Chair takes aim at auditors' controls testing and says mandatory rotation could be difficult," Reuters, November 11, 2011 ---
    http://www.reuters.com/article/2011/11/11/us-auditor-watchdog-doty-idUSTRE7A95XQ20111111

    Auditors are not properly testing U.S. companies' internal accounting controls, the head of the main auditor watchdog said, while also reiterating urgent concerns about audit firm inspections in China.

    Internal controls on books and records -- a requirement imposed on corporations by 2002's post-Enron Sarbanes-Oxley laws to combat accounting fraud -- are not being properly tested by outside auditors, Public Company Accounting Oversight Board (PCAOB) Chairman James Doty said on Thursday.

    "This is a very major issue for us," Doty told Reuters on the sidelines of a securities regulation conference.

    Internal control rules for ensuring the adequacy of accounting record-keeping and checks were among the costliest changes mandated by Sarbanes-Oxley, often requiring sophisticated electronic systems and detailed audits.

    Auditors are supposed to gain an understanding of the controls put in place by companies and test them, but "some auditors are just taking the business process that the company has put in place as a control," Doty said.

    Touching on another key issue for his group and auditors, Doty said the PCAOB needs to gain entrance soon to China to inspect firms that audit U.S.-listed companies.

    "We are not talking about something that should happen three years from now. It needs to happen now," he said.

    PRESSING CHINESE REGULATORS

    A meeting planned for October between U.S. and Chinese regulators to talk about inspections was canceled by the Chinese, possibly because of leadership changes at their regulatory body, Doty said.

    Late last month, China announced the appointment of Guo Shuqing as the new head of the China Securities Regulatory Commission, in a reshuffle of key financial regulators.

    The PCAOB and the U.S. Securities and Exchange Commission have been encouraging the new CSRC chairman to resume talks over inspections, Doty said.

    The PCAOB negotiated agreements this year to inspect audit firms in the United Kingdom, Switzerland and Norway, but Chinese regulators have resisted U.S. inspections on the grounds that it would infringe on their authority.

    The PCAOB is struggling over whether audit firms in China should lose their U.S. registration if that country does not allow inspections of its auditors, Doty said.

    "It is not something we want to have happen," he said.

    SEES PROBLEMS WITH TERM LIMITS

    In a speech at a Practicing Law Institute conference, Doty indicated a controversial proposal to require term limits for audit firms to increase their independence could be difficult to put into practice.

    "I recognize now that audit firm rotation presents considerable operational challenges," he said.

    The PCAOB in August issued a "concept release," or initial report, on rotation, the first step in drafting changes in auditor standards. It is seeking comments on the proposal through December 14.

    Considered as early as the 1970s, audit firm rotation has been strongly opposed by audit firms, which would lose some of their most lucrative clients if it went into effect.

    Sarbanes-Oxley mandated that lead auditors be switched every five years, but put no term limits on audit firms.

    Continued in article

    Bob Jensen's threads on professionalism and independence in auditing ---
    http://www.trinity.edu/rjensen/Fraud001c.htm