What’s going on in the big firms? Part I

A number of bloggers have been talking about audit quality issues in the Big 4 environment. Francine McKenna has a lengthy post that provides some background. Also focuses on the visible attitude of Deloitte.  Read her post:  At Deloitte, More Pain Before Any Quality Gain.

For those of us in small firms, the Big 4 world is far removed from our life.  And for all the CPAs I know, that is a good thing.

On the other hand, it would be good for us to pay occasional attention to that world because if they get in trouble, it affects all of us.  This article would be a very good place to start to get a feel for what’s going on that world.

There seems to be some issues with audit quality. The PCAOB has released inspection reports for PwC and KPMG on their audits performed in 2010 on 2009 financials.  For PwC, there were 28 engagements with deficiencies out of 71 inspections.  For KPMG, there were 12 with deficiencies out of 52 inspected.

Ms. McKenna quotes a Wall Street Journal report which says:

The Public Company Accounting Oversight Board said many of the deficiencies it found in its 2010 inspection reports of the two firms, released Monday, were significant enough that it appeared the firms didn’t obtain sufficient evidence to support their audit opinions.

That’s not good.  From 23% to 39% of engagements have “deficiencies.”  Ouch.  In addition, “many” of them did not have sufficient evidence to support the opinion. Reading between the lines, I think it means they were deficient engagements. Double ouch. 

A quarter or half of engagements have issues?  Even if you assume there is a tremendous volume of quibbling by inspectors (which assumption I’m quite willing to make by the way), that is too many engagements with issues.  I’m not going to dig further to find out the count of what constitutes “many” deficient audits, but any deficient audits surfacing from a PCAOB inspection is too many. 

Ms. McKenna’s main focus is on the response of the firms.  KPMG and PwC are working on fixing things.  In contrast, she points out Deloitte is arguing and fighting with PCAOB.  That is not a good place to be.  Check out her post for lots of detail.

The training document she has read indicates the Deloitte firm expects more bad news when the PCAOB reports for the 2009, 2010, and 2011 inspections are released.  Basically, inspection reports in the pipeline will come out before the firm is able to create change and improve product quality.  There’s more bad headlines on the way.

Thus, the title of her post – more pain before any quality gain.

We small firms can learn from this mess.  More from me later.