The Public Company Accounting Oversight Board has issued its latest inspection report on BDO USA and found several audit failures and deficiencies.

The PCAOB reviewed 31 audits and found significant deficiencies with audits of eight companies in the board’s 2010 inspection of the firm.

“The inspection team identified matters that it considered to be deficiencies in the performance of the audit work it reviewed,” said the PCAOB 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.”

The PCAOB inspection team considered some of the deficiencies to be “audit failures.”

“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,” said the PCAOB.

In one of the eight cases, the client company identified goodwill impairment indicators for all of its reporting units and determined, based on a comparison of its consolidated market capitalization plus debt to the recorded value of its net assets, that an impairment charge for the full balance of goodwill for all of its reporting units should be recorded. However, BDO failed to evaluate the issuer's assertion that the enterprise value was the most appropriate fair value estimation approach for its three reporting units and to consider why none of the alternative valuation methods that the issuer had used in the prior year's analysis was employed in the current year.

“Furthermore, in testing the issuer's measurement of the impairment, the firm failed to evaluate the issuer's assertion that the book value of its consolidated net assets approximated their fair value as of the impairment date, and failed to evaluate whether the issuer's approach was in conformity with GAAP,” said the PCAOB.

In another instance, BDO failed to obtain sufficient appropriate audit evidence to support its audit opinion, including failing to perform sufficient procedures in relation to a significant multi-year sales contract. “Specifically, the firm failed to evaluate whether the issuer had identified the accounting elements arising from the various deliverables specified in the arrangement and whether the contract consideration was appropriately measured and allocated to the deliverables,” said the PCAOB. The firm also failed to perform sufficient procedures to test the valuation of inventory for the same client.

BDO had no comment beyond the letter included in the PCAOB’s report. “We have evaluated each of the matters described in Part I of the draft report,” said the firm. “In that regard, we have considered whether it was necessary to perform additional procedures in accordance with AU 390, Consideration of Omitted Procedures After the Report Date, and AU 561, Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report and, where appropriate, performed such procedures. None of the matters identified by the PCAOB or the results of procedures subsequently performed impacted our previously issued reports on the financial statements.”

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