Benjamin Franklin once defined insanity as doing the same thing over and over and expecting different results. On a personal level, I could have applied this logic to my study habits in high school and college and their subsequent relation to my test results. You would think that after seven years or so, it would have dawned on me that something in the process was flawed.On a professional level, one could equate it with many of the Public Company Accounting Oversight Board's audit inspection reports.
The audit overseer's inspection process has, thus far, yielded a disturbing pattern of audit "deficiencies" by the Big Four and legions of others. The board has also censured a number of audit firms, as well as rightfully barred a number of practitioners from auditing publicly traded clients or employment with a registered accounting firm.
To be fair, a number of firms have yielded stellar results in their examinations, but sadly, like a good sports referee, you don't draw attention if you're doing your job.
In the PCAOB's 2007 inspections, both Deloitte and Ernst & Young were each cited in eight of their audits. For E&Y, that actually represented an improvement over the previous year's tally, in which the board had singled the firm out in 10 audits. The PCAOB said that in some cases, the audit deficiencies "were of such significance that it appeared to the inspection team that the firm, at the time it issued its audit report, had not obtained sufficient competent evidential matter to support its opinion on the issuer's financial statements."
I think I've read that phrase somewhere before. Oh right, it was in previous PCAOB inspection reports. So I'm a bit confused. This is not the first year that firms have had to undergo inspection. I find it hard to believe that the deficiencies uncovered in 2007 were that far afield from those unearthed in 2005.
Ben Franklin might have had an opinion on that.
What's even more disturbing is the scenario of a client audit implosion followed by a class-action attorney waving past inspection reports listing the audit deficiencies of his client's audit firm. From there, how long do you envision it would be before a flood of litigation begins, if it's not already happening?
In Miami, a jury just found BDO Seidman guilty for its failure to detect audit fraud that prompted a Florida financial services company to declare bankruptcy. Because of the Florida venue and its state laws, BDO could be on the hook for triple the amount of investors' losses as a result of the company's collapse, a sum that could exceed half a billion dollars. I don't know of many firms that could comfortably shoulder that size award.
If the PCAOB's audit reports begin to get introduced into evidence, then many firms may have a fairly massive problem on their hands. It may be time to change the way they do things, or else it's going to get insane.
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