PCAOB Continues Sadistic Treatment of Accounting Firms' Audits: BDO Edition

Earlier we gave you the lowdown on Good Grant Thornton Times courtesy of the PCAOB. As promised, we're back with the OB's inspection report on everyone's favorite Teflon firm, BDO.

According to CFO, BDO's main problems appear to be with documentation and actually doing work, "According to the reports, the shortcomings were usually based on a lack of documentation and persuasive evidence to back up audit opinions."

Translation: Basically BDO may or may not have actually done the work they said they did but didn't bother creating workpapers that show that they actually did the work. The PCAOB is not down with just an auditor's good word.

Some poor audit associate probably spent 36 straight hours of auditing but didn't bother creating the workpaper. And, similar to the GT case, the managers and partners were apparently still cool with it.

There are other situations where the Peek-at-Boobs thought that BDO just decided they weren't going to do the work including "channel stuffing" and misstatements due to possible fraud (not really a problem these days anyway).

BDO took the criticism better than GT though, saying, "an inherent part of our audit practice involves continuous improvement." They figured that they were pushing their luck after dodging the Banco Espirito bullet.

Audit Overseer Faults BDO, Grant Thornton [CFO.com]

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PCAOB Continues Sadistic Treatment of Accounting Firms' Audits

Since none of you decided to spend your weekend reading and reporting on the PCAOB inspection reports on Grant Thornton and BDO, we had rely on CFO to give us the gory details.

We'll give you the skinny on G to the T first and we'll hit BDO later.

CFO:

Deficiencies highlighted in the inspection report on Grant Thornton, meanwhile, included failures to "identify or appropriately address errors" in clients' application of GAAP. In addition, inadequacies were said to have been found with respect to performing necessary audit procedures, or lacking adequate evidence to support audit opinions.

Tramp Interpretation: With regard to "identify or appropriately address errors", it appears that GT doesn't know their GAAP or they haven't found any effective passive-aggressive methods of informing their clients that they don't know how to apply GAAP.

Regarding "inadequacies...performing necessary audit procedures or lacking adequate evidence to support audit opinions": staff on the engagement didn't understand what they were supposed to do, or they attempted to do something and did it half-assed. Managers and partners on the engagement were apparently okay with that.

Grant Thornton responded to the report with a written response that included the following:

"While we believe that the PCAOB should continue to challenge judgments and documentation during the inspection process, we do not believe that, in the end, reasonable judgments should be criticized and second guessed. Such a process will ultimately lead to inefficient audits due to the fear of unnecessary criticism."

Tramp Interpretation: We are much smarter than you. We are very sensitive and don't like being questioned. This oversight business isn't really for us. We suggest that it be done away with.

Audit Overseer Faults BDO, Grant Thornton [CFO.com]

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PCAOB Releases Grant Thornton and BDO Seidman Inspection Reports

Light reading for the weekend:

Grant Thornton

BDO

Everyone owes 500 words for each firm by Monday morning. We'll address here at some point. The weekend is getting started early so don't expect it to be today. Sphere: Related Content

We Hate to Admit it...

Sometimes, just when you think the blog gods have smiled sweetly upon you, disappointment occurs.

The latest victim of the PCAOB's version of the public rectal exam was a Tramp fave, KPMG.

But to the disappointment of the Tramp, the Radio Station didn't really fare that bad compared to the lashings that were received by the Big D, E&Y, and McGladrey.

The PCAOB, in its infinite wisdom, stated that "KPMG did not show enough skepticism toward clients last year". What did they use to measure the skepticism shown, a Rolatape? They went on to say that in one instance the firm was "shy an appropriate amount of internal controls testing".

Have you ever done internal control testing? I'd only wish a fate of that magnitude on the likes of Dick Cheney. Of course someone is going to be shy the appropriate amount of testing. Had they continued to the "appropriate amount" there certainly would have been mass suicide on engagement teams.

No auditor is perfect, Peek-at-boobs, so making mountains out of molehills in this case won't fly with us.

Nicely played Radio Station. You've earned this one.

KPMG Should Be Tougher on Testing, PCAOB Finds [CFO.com] Sphere: Related Content

PCAOB: SEC Is Taking Its Sweetass Time So We Are Not a Go

Just released:

In June 2008, the Board adopted and submitted for approval by the Securities and Exchange Commission rules that, among other things, require each registered firm to submit an annual report on Form 2 by June 30 of each year. The Board provided that the rules would take effect 60 days after Commission approval. The rules remain pending before the Commission for approval and will not be effective before June 30, 2009. Accordingly, there is no requirement for registered firms to file an annual report or pay an annual fee in 2009. Under the rules as adopted by the Board, the first annual report on Form 2 will be due on the first June 30 that occurs after the rules take effect, and the first annual fee, in an amount to be announced by the Board at a later date, will be due in that same year. The separate obligation to file any required special reports on Form 3 will commence as soon as the rules take effect, 60 days after Commission approval. [Emphasis ours]

Because, you know, the Commission has been busy not stopping Ponzi schemes and whatnot. Sphere: Related Content

Breaking: PCAOB Chair Resigns

Mark Olson, chairman of the Public Company Accounting Oversight Board has resigned. He has been the chair since July 2006. His resignation will take effect on July 31.

Chairman Olson Announces His Resignation [PCAOB Press Release] Sphere: Related Content

...And Then the PCAOB Celebrated at TGI Friday's

The PCAOB is continuing its rape and pillage of auditors of public companies. After having its way with Deloitte and McGladrey & Pullen, the PCAOB thought it would take a little detour through Times Square to E&Y.

According to the PCAOB, E&Y sucks at a lot of things including but not limited to:

• Revenue recognition
• Compiling enough evidence for valuation of securities
• Obtaining appropriate evidence for estimating the valuation of income tax allowances

Per CFO.com:

The deficiencies were linked to the firm's national office in New York and 22 of its 85 U.S. offices. These errors were significant enough for the oversight board to conclude the firm "had not obtained sufficient competent evidential matter to support its opinion on the issuer's financial statements or internal control over financial reporting."

Ok, so deficiencies at 22 out of 85 offices is approximately...not very fucking good.

Oh, and the best part is that two of clients with the revenue recognition deficiencies ending up restating their financial statements. Oops.

PCAOB Rips E&Y on Revenue Recognition [CFO]

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A Note to the PCAOB Lawyers: Bring Some Homemade Videos for Clarence Thomas and You'll Be Fine

The constitutionality of the existence of the PCAOB, created by the Sarbanes-Oxley Act, will be argued in front of the Supreme Court this fall, per CFO.

In a case that will be far less interesting than Hustler Magazine v. Farwell, the high court will decide whether the PCAOB's existence "violates the Constitution's separation-of-powers principle".

The plaintiffs in the case are the Free Enterprise Fund, a policy group that supports "small government". Timing might not be the best, Free Enterprise Fund...

...With Souter stepping down and Obama likely to appoint someone likely to support to more regulation as opposed to less, good money would be with the PCAOB on this.

Supreme Court to Rule on PCAOB's Fate [CFO] Sphere: Related Content

PCAOB Continues to Bitch-Slap Auditors of Public Companies

McGladrey & Pullen is the latest victim of the PCAOB's wrath. You might recall my post regarding the results for Deloitte.

The reoccurring theme, as far as anyone can tell, is that auditors of public companies really don't do the work they are supposed to do. Everything just appears reasonable, as some of you are quite aware...

Here's an excerpt from the report, courtesy of CFO:

Issuer A: The auditor failed to perform sufficient procedures concerning the valuation of investment securities. A McGladrey-hired specialist came up with two different fair values of securities that were both lower than the issuer's estimates. McGladrey didn't know why the specialist had changed his or her estimate nor fully grasp the methods and assumptions the specialist had used.

Issuer B: The firm failed to sufficiently evaluate the reasonableness of specific impairment reserves. For one of three large impaired loans used to test the client's overall impaired-loan population, the firm didn't test the sources of data and the reasonableness of assumptions used to make a fair-value estimate.

Issuer E: The firm failed to perform sufficient procedures to test the existence of revenue. In addition, the firm's sample size to confirm accounts receivable was "insufficient to achieve the necessary level of assurance.

I'll translate/opine one at a time:

Issuer A: Fancy-pants specialist came up with two numbers both lower than the issuer and M&P didn't know why the estimate changed or fully understood the methods used or assumptions made by said fancy-pants specialist. I'm going to wildly speculate that the auditors ended up going with the higher valuation anyway. Forget that they can't understand that they don't know what the hell the specialist is doing.

Issuer B: Impaired loan reserves not sufficiently tested for reasonableness. M&P apparently shares notes with Deloitte. That must come in handy during peer review, "Oh, you test this just like us and we came to the same conclusion. Great minds think alike!"

Issuer E: Noted without comment: "Failed to perform sufficient procedures to test the existence of revenue".

Next!

PCAOB Knocks McGladrey on Loan-Loss Reserves [CFO]

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PCAOB to Deloitte: You Suck

It's hardly a surprise that Deloitte takes exception with the PCAOB's most recent inspection report. Would you expect them to say: "Gosh, PCAOB, you're right. We've made lots of mistakes. Thanks for pointing them out to us."?

Audit partners don't concede to making mistakes or being wrong. They just don't. You can ask any controller or CFO out there. All they have to do is say, "If you don't agree with us, we'll slap a material weakness on your ass."

Best quote from the report is: "Those deficiencies included failures by the firm to identify or appropriately address errors in the issuer's application of GAAP, including, in some cases, errors that appeared likely to be material to the issuer's financial statements" (emphasis mine).

Oh, and this: "The PCAOB inspectors concluded that in some instances, Deloitte had not gathered enough evidence to support its audit opinions." (Emphasis mine again)

Oops.

Deloitte to PCAOB: Don't Second-Guess Us [CFO] Sphere: Related Content