The Public Company Accounting Oversight Board published previously nonpublic portions of its inspection report from 2008 of Deloitte & Touche LLP after the firm failed to address problems with its audit procedures after a 2007 report.

The PCAOB in part criticized the firm’s quality controls and skepticism about management assertions.

“The inspection results provide cause for concern that the Firm’s system of quality control may not do enough to assure that accounting and auditing issues are evaluated with the objectivity that is contemplated in the auditing standards,” said the report. “In too many instances, the inspection team observed that the engagement team’s support for significant areas of the audit consisted of management’s views or the results of inquiries of management. The Firm’s apparent failure to appropriately challenge management’s representations occurred in numerous areas, including when the Firm evaluated management's estimates, considered the valuation of investment securities, performed alternative procedures in connection with confirmations, and tested income tax accounts and disclosures.”

The report also pointed to problems with Deloitte’s culture. “These deficiencies may result, in part, from a Firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis and collection of objective evidence, and that rely largely on management representations,” said the report. “While it appears that the Firm has instituted positive changes to its audit practice over the years of PCAOB inspections, and that the Firm’s senior leadership has accepted the need to do so, some questions remain about whether the Firm’s audit personnel have embraced the concept that change in audit performance is necessary in order to achieve compliance with PCAOB standards.”

Deloitte defended its audit procedures in response to the report. “We have complete confidence in our professionals and the quality of our audits, and agree that there were and always will be areas we can improve,” Deloitte LLP CEO Joe Echevarria said in a statement Monday, according to Reuters. “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.”

The PCAOB also released a statement to explain why it decided to make public the previously confidential sections of its report.

“The quality control remediation process is central to the Board’s efforts to cause firms to improve the quality of their audits and thereby better protect investors,” said the PCAOB. “The Board therefore takes very seriously the importance of firms making sufficient progress on quality control issues identified in an inspection report in the 12 months following the report. Particularly with the largest firms, which are inspected annually, the Board devotes considerable time and resources to critically evaluating whether the firm did in fact make sufficient progress in that period. The Board can and does make the relevant criticisms public when a firm has failed to do so.”

The PCAOB noted that it is not unusual for an inspection report to include nonpublic criticisms of several aspects of a firm's system of quality control. "Any Board judgment that results in later public disclosure is a judgment about whether the firm made sufficient effort and progress to address the particular criticisms articulated in the report on that firm in the 12 months immediately following the report date," said the PCAOB. "It is not a broad judgment about the effectiveness of a firm's system of quality control compared to those of other firms, and it does not signify anything about the merits of any additional efforts a firm may have made to address the criticisms after the 12-month period. The Board, however, takes very seriously the importance of firms taking meaningful remedial steps promptly, and the Board will make the relevant criticisms public when a firm has failed to take sufficiently meaningful steps within the 12 months following the report date."

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