PWC and KPMG Weaknesses Identified

The Public Companies Accounting Oversight Board (PCAOB) identified weaknesses with two of “The Big Four” auditing firms in its 2010 report.  Many deficiencies found were said to be significant enough to conclude that the firm did not have enough evidence to make a recommendation.  The 28 of PWC were out of 75 that were inspected by the PCAOB.  In 2009, only nine audits had the same outcome.  KPMG had 12 audits identified with weaknesses out of a potential 54, up from eight in 2009. 

Most of the problems found were testing of fair value, revenue and receivable testing and testing of goodwill and other intangibles.  The PCAOB will only release part of the report, while the rest will remain confidential.  The firms will then have one year to address all of the issues before they are made public.

This is a similar situation to another blog entry I wrote earlier this month.  In that instance, Deloitte was the firm being investigated.  This article is different in it identifies two firms, both which have numerous deficiencies presented.  PWC and KPMG provide services to thousands of clients each, so this sample size may be skewed in favor of the PCOB.  It is also not necessarily a bad thing that these were brought to the firms’ attention.  A good firm will look at what was presented to them and make the necessary adjustments.

Often times, I think the large public firms think they need to present a positive audit outcome to the managers of their clients.  They think retaining customers is their biggest challenge, and audit leaders risk losing their jobs if they can’t retain clients.  This is a flawed perception, though.  Auditors should act professionally, so others looking for information are able to find it accurate and reliable.

I believe the audit world will change considerably in the near future.  I believe there will be some kind of regular rotation (yearly possibly), so no audit manager feels as though they need to “please” the organization they happen to be auditing.  I certainly hope this is something that is addresses with more of these cases being presented.  For now, the PCAOB is doing as well as it can to make sure audit firms are acting appropriately, and doing the work as well as they can.