PCAOB Dings Ernst & Young and Grant Thornton for Not Fixing Audit Problems

The Public Company Accounting Oversight Board has made public additional portions of a 2010 inspection report on Ernst & Young and 2008 and 2009 inspections of Grant Thornton because the firms failed to adequately address some of the quality control problems that the PCAOB had identified within a year, although Grant Thornton claims the problems have since been addressed.

In the case of EY, the PCAOB said in its expanded report that as of Nov. 30, 2012, the firm had not addressed certain criticisms in the report to the board’s satisfaction. Among the problems identified were deficiencies in the engagement quality review process. In an inspection of four audits, PCAOB inspectors found that the partners did not appropriately evaluate significant judgments and related conclusions, and did not perform reviews at a sufficient level of rigor and detail. The inspection results also indicated that the firm, in certain instances, relied heavily on evidence that supported the issuer's conclusion, without sufficiently taking into account new or contrary evidence that was available at the time. “This tendency frequently contributed to the concerns noted in prior inspection reports related to a lack of professional skepticism and deficiencies in auditing estimates,” said the PCAOB.

In response to the report, Ernst & Young said the performance of quality audits is its number one priority but admitted that the PCAOB had found its remediation efforts insufficient.

“We have taken substantial remedial actions with respect to both matters, including significantly enhancing our policies and practices in the two areas noted,” said the firm. “This includes providing our audit professionals with new audit tools, additional training and expanded technical guidance. More broadly, we have also significantly increased the number of partners and staff devoted to quality-control and quality-improvement measures across our firm. These efforts have been beneficial generally and continue to improve the quality of the audits we perform. At the same time, we can and will continue to improve the quality of our audits–both generally and in the areas highlighted by the publicly released portions of Part II of our 2010 Inspection Report. Our commitment to high quality audits extends to all levels of the firm, from our leadership to our audit teams.”

EY also sent the following statement to Accounting Today: “As a firm, we are fully committed to delivering high quality audits. We respect and benefit from the PCAOB inspection process as it assists us in identifying areas where we can continue to improve.”

In its report on the 2009 inspection of Grant Thornton, the PCAOB found quality control problems in testing internal control. The report said the firm relied on information technology general controls despite deficiencies in the controls and failed to perform sufficient audit procedures to support its conclusion that certain application controls were operating effectively. The PCAOB inspectors also identified six engagements with deficiencies in the firm’s testing of fair value measurements and impairment determinations.

The report on the 2008 inspection points to problems with the effectiveness of GT’s quality controls relating to auditing accounting estimates, and with the application of sufficient professional skepticism, supervision and review.

The firm said the PCAOB has found that it has since addressed the problems. “As they have done with several global auditing firms, the PCAOB has decided to release portions of Part II of our 2008 and 2009 inspection reports,” Grant Thornton said in a statement emailed to Accounting Today. “The PCAOB has also notified us that they have determined that our remedial actions related to the 2010 inspection report address the report’s criticisms to the Board’s satisfaction. We take all of the PCAOB’s findings seriously. Accordingly, we have taken additional steps subsequent to the issuance of each inspection report to continue to comprehensively enhance our audit quality in the areas identified by the PCAOB. Grant Thornton’s success is dependent on the quality of the product we deliver and we are committed to a spirit of continuous quality improvement.”