The Public Company Accounting Oversight Board released a report Tuesday on its 2012 inspection of Deloitte & Touche LLP, indicating that it found problems in 12 of the 51 audits performed by the firm that it inspected and in one other audit in which the firm was involved.

In the report, it noted that the PCAOB inspection team considered certain of the deficiencies that it observed 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 and/or on the effectiveness of internal control over financial reporting,” said the report. “In addition, one of the identified deficiencies, which occurred in an audit in which the firm played a role but was not the principal auditor, was of such significance that it appeared that the firm had not obtained sufficient appropriate audit evidence to fulfill the objectives of its role in the audit.”

With some of the audits, Deloitte failed to sufficiently test the issuer’s controls over the valuation of goodwill or to sufficiently test the existence of the issuer’s inventory and the issuer’s controls over it. With another issuer client that capitalized a portion of the costs of the compensation of certain members of senior management, Deloitte’s testing of the design effectiveness of controls over the capitalization of these costs was insufficient, according to the PCAOB, as the firm failed to evaluate whether those controls met the issuer’s control objectives related to its policy for capitalizing compensation costs.

With another client, Deloitte’s procedures to test revenue related to certain multiple-element arrangements were insufficient, in that it failed to appropriately test whether the issuer had established vendor-specific objective evidence of the value for each of the issuer's defined customer-pricing classes. In evaluating the pricing, Deloitte tested the transactions at an aggregated level and at the level of individual transactions, but not at the level of the issuer's customer-pricing classes, the PCAOB pointed out.

In response to the report, Deloitte executives said they had taken steps to address the matters discussed in the inspection team findings.

“Executing high quality audits is our number one priority,” wrote Deloitte LLP CEO Joseph Echevarria and Deloitte & Touche LLP chairman and CEO Gregory G. Weaver. “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.”

Asked about the report, Deloitte spokesman Jonathan Gandal pointed out to Accounting Today that the number of comments in the latest PCAOB inspection report had dropped significantly. "Deloitte is committed to the highest standards of audit quality. The PCAOB’s inspection process plays an important role in the achievement of our shared objective of ensuring high quality audits that serve investors and the public interest," he said in an emailed statement from the firm. "The downward trajectory in inspection comments reflected in the PCAOB’s 2012 report is a direct result of the substantial investments we have made and continue to make in audit quality.  We constantly challenge ourselves to do better, and look forward to continuing our constructive engagement with the PCAOB, audit committees and other stakeholders in pursuit of further enhancing the quality of our audits."

Separately, Deloitte has reportedly asked a federal judge to dismiss a lawsuit by the Securities and Exchange Commission seeking access to its audit work papers in a case involving a Chinese audit client, Longtop Financial Technologies, according to Reuters. In a court filing, lawyers for Deloitte pointed to a deal announced last week by the Public Company Accounting Oversight Board giving the PCAOB access to audit work papers at Chinese affiliates of firms like Deloitte when they are the subject of a PCAOB enforcement action (see PCAOB Signs Enforcment Cooperation Agreement with Chinese Regulators).

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