The Public Company Accounting Oversight Board has released its latest inspection reports on Deloitte & Touche, Ernst & Young and Grant Thornton, and identified deficiencies with several of the audits it inspected.

The PCAOB posted the three reports on its Web site last Friday. In the report on Deloitte & Touche, dated Nov. 28, 2012, the PCAOB discussed audit deficiencies at 22 of the firm’s clients. The report said the PCAOB has inspected 52 audits performed by the firm in 2011, along with one other audit in which Deloitte played a role but was not the principal auditor. In 22 of the audits, the inspectors found deficiencies of various kinds.

“The inspection team identified matters that it considered to be deficiencies in the performance of the audit work it reviewed,” said the report. “Those deficiencies included failures by the firm to identify, or to address appropriately, financial statement misstatements, including failures to comply with disclosure requirements, as well as failures by the firm to perform, or to perform sufficiently, certain necessary audit procedures. In some cases, the conclusion that the firm failed to perform a procedure was based on the absence of documentation and the absence of persuasive other evidence, even if the firm claimed to have performed the procedure.”

In the case of one unidentified client company, Deloitte failed to identify a departure from U.S. GAAP in which the client inappropriately allocated to goodwill, rather than to a definite-lived intangible asset, a portion of the purchase price of a group of assets. In addition, Deloitte failed to perform sufficient procedures to test the valuation of goodwill for one of the client’s segments, the report noted.

Deloitte said it was taking actions to address the matters identified by the inspection team. “Executing high-quality audits is our number one priority,” wrote Deloitte LLP CEO Joe Echevarria and Deloitte & Touche LLP chairman and CEO Gregory Weaver, in response to the report. “We are confident that the investments we have made and are continuing to make in our audit processes, policies and quality controls are resulting in significant enhancements to our audit quality.”

Ernst & Young
The Ernst & Young report, dated Dec, 6, 2012, also described problems uncovered during the 2011 inspection of the firm. The report describes deficiencies at 20 of E&Y audit clients, out of the 55 audits inspected by the board. Deficiencies included failures by E&Y to identify, or to address appropriately, financial statement misstatements, including failures to comply with disclosure requirements, as well as failures by the firm to perform, or to perform sufficiently, certain necessary audit procedures. In some instances, follow-up between the firm and the issuer led to a change in the issuer's accounting or disclosure practices.

In some cases, the conclusion that the firm failed to perform a procedure was based on the absence of documentation and the absence of persuasive other evidence, even if E&Y claimed to have performed the procedure. One of the deficiencies related to auditing aspects of an issuer's financial statements that the issuer restated after the primary inspection procedures.

“The inspection team considered certain of the deficiencies that it observed to be audit failures,” said the report. “Specifically, certain of the identified deficiencies were of such significance that it appeared that the firm, at the time it issued its audit report, had failed to obtain sufficient appropriate audit evidence to support its audit opinion on the financial statements and/or on the effectiveness of internal control over financial reporting.”

E&Y said it had taken action to address the findings, but also defended its audits. “There are certain findings in the report where we believe the totality of the audit work performed supported our opinion on the financial statements, taken as a whole, and on the effectiveness of internal control over financial reporting,” wrote managing partner Stephen R. Howe Jr., and vice-chairman of assurance services G. Thomas Hough, in a letter included in the report. “Notwithstanding this view, we have amended certain of our policies, procedures or practices to respond to the board’s observations and better align our prospective audit performance with our shared objectives.”

Grant Thornton
The 2011 inspection of Grant Thornton also revealed some deficiencies, according to a PCAOB report dated Dec. 18, 2012. The report detailed problems with audits of 13 issuers, along with deficiencies in three audits related to testing fair value measurement and disclosure.

The PCAOB inspection team reviewed 35 of Grant Thornton’s audits. Deficiencies included failures by the firm to identify, or to address appropriately, financial statement misstatements, including failures to comply with disclosure requirements, as well as failures to perform, or to perform sufficiently, certain necessary audit procedures.

In one instance, follow-up related to the deficiency led to a change in the issuer's accounting practices. In some cases, the conclusion that GT failed to perform a procedure was based on the absence of documentation and the absence of persuasive other evidence, even if the firm claimed to have performed the procedure.

Grant Thornton said it had carefully considered all of the report findings and would take the necessary steps. “We look forward to the continuing dialogue as we pursue our shared goals of improving audit quality across the profession and protecting the investing public,” wrote Grant Thornton CEO Stephen Chipman and national managing partner of audit services R. Trent Gazzaway in response to the report.