PCAOB Identifies Audit Failures in Deloitte Inspection

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The Public Company Accounting Oversight Board posted its 2010 inspection report on Deloitte & Touche on Tuesday, highlighting what it called “audit failures.”

The 2010 inspection of Deloitte included reviews of aspects of 57 audits performed by the firm and reviews of the firm’s audit work on one issuer audit engagement in which the firm played a role but was not the principal auditor. The PCAOB said its inspection team selected the audits and aspects to review, and the firm was not allowed to limit or influence the selections. The report describes 26 audits in which the PCAOB's inspectors found problems, but does not identify the clients.

The PCAOB inspection team identified matters that it considered to be deficiencies in the performance of the audit work it reviewed, according to the report. Those deficiencies included failures by Deloitte 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 one instance, follow-up between the firm and the issuer led to a change in the issuer’s accounting,” said the report.

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, according to the report.

“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 (ICFR). 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 to the inspection team that the firm had not obtained sufficient appropriate audit evidence to fulfill the objectives of its role in the audit.”

Deloitte said it was working to correct the deficiencies identified in the report. “Deloitte is committed to the highest standards of audit quality,” said a statement forwarded by spokesman Jonathan Gandal. “The PCAOB’s inspection process serves an important role in the achievement of our shared objectives of improving audit quality and serving investors and the public interest. We have carefully reviewed the PCAOB’s 2010 Inspection Report, and have taken actions as appropriate to address each of the findings on individual audits identified in Part I. We are also addressing those areas where the PCAOB has offered observations with respect to our system of quality control and broader matters related to audit quality.  In our drive for continuous improvement, we have been making a series of investments focused on strengthening and improving our practice, and will continue to do so to make Deloitte the standard for audit quality.”

In October, the PCAOB unsealed previously nonpublic portions of its inspection report from 2008 of Delioitte & Touche after the firm failed to address the problems found with its audit procedures in a 2007 report (see PCAOB Unseals Deloitte Criticisms).

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