Audit Watchdog Finds Higher Deficiency Rates at Two of Big Four

Public-company audits conducted by two of the so-called Big Four accounting firms showed greater deficiency rates last year than in previous reviews, according to findings released by a Washington-based watchdog.

The Public Company Accounting Oversight Board found flaws in 28 of 75 reviewed audits by PricewaterhouseCoopers LLP and 12 of 54 from KPMG LLP, according to inspection reports posted to the PCAOB website today. Both totals reflected increases from previous years, according to PCAOB data.

PwC “failed to obtain sufficient appropriate audit evidence to support its audit opinion” in some cases, and KPMG neglected “to identify, or to address appropriately, financial statement misstatements, including failures to comply with disclosure requirements,” according to the reports, which were based on inspections conducted last year.

The PCAOB is a nonprofit corporation, funded by fees on public companies, that regulates and inspects auditors under the oversight of the Securities and Exchange Commission. It was created by the Sarbanes-Oxley Act of 2002 after accounting scandals contributed to the collapses of Enron Corp. and WorldCom Inc.

On Oct. 17, the watchdog issued its first public report of unresolved deficiencies against one of the Big Four, saying Deloitte & Touche LLP repeatedly failed to support assumptions in audits examined in a 2007 inspection and hadn’t fixed the problems in its allotted time. Firms have at least a year to respond to concerns raised in the inspections, and if they do so, no further reports are released.

‘Important Role’

“The PCAOB’s inspection process since 2003 has played an important role in improving audit quality, and their insights have measurably helped KPMG as we work to continuously improve,” George Ledwith, a company spokesman, said in an interview.

Robert Moritz, U.S. chairman and senior partner at PwC, released a statement today acknowledging the “increase in the number of deficiencies in our audit performance” over prior inspections.

“We are working to strengthen and sharpen the firm’s audit quality,” Moritz said in the statement.

Colleen Brennan, a spokeswoman for the PCAOB, declined to comment on the contents of the inspection reports, saying they “must speak for themselves.”

The PCAOB doesn’t identify the audited companies in its inspection reports. Ernst & Young LLP is the fourth member of the Big Four.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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