Ernst & Young Faulted for Audit Failures

The Public Company Accounting Oversight Board released its latest inspection report of Ernst & Young on Thursday and found that some of the deficiencies it uncovered rose to the level of “audit failures.”

“The inspection team considered certain of the deficiencies that it observed to be audit failures,” said the report. “Specifically, the deficiencies identified were of such significance that it appeared to the inspection team 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.”

The 2010 inspection of E&Y included reviews of aspects of 62 audits performed by the firm and a review of the firm's audit work on another issuer audit engagement in which E&Y played a role but was not the principal auditor. Problems were found in 13 of the audits, an increase from five deficiencies found in a 2009 inspection report that examined 58 audits. The PCAOB said its inspection team selected the audits and aspects to review, and the firm was not allowed an opportunity to limit or influence the selections.

“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 the failure 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.”

Earlier this week, the PCAOB also released its latest inspection report of Deloitte & Touche, in which it also uncovered audit failures (see PCAOB Identifies Audit Failures in Deloitte Inspection).

In the case of Ernst & Young, among the problems identified were deficiencies in testing the fair value measurements and disclosures of financial instruments without readily determinable fair values, such as private debt securities, U.S. government agency securities, auction-rate securities, interest rate swaps and options, asset-backed securities, and collateralized debt obligations. On seven such audits, E&Y failed to obtain sufficient appropriate audit evidence to support its audit opinions.

E&Y plans to use the inspection results to improve its audit processes.

“The inspection process is a central element in furthering the PCAOB's independent audit oversight mission,” said E&Y spokesman Charles Perkins in an emailed statement. “The PCAOB’s observations benefit our efforts to continuously strengthen our audit processes and improve the high quality of our audit services.”

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