Tuesday, November 22, 2011

US watchdog finds fault with audits at KPMG and PwC

(Nov 21): The Public Company Accounting Oversight Board, the watchdog for U.S. accounting firms, has taken issue with audits performed by two of the "Big Four" auditors, KPMG and PricewaterhouseCoopers (PwC).

In reports posted on the PCAOB website on Monday, PwC was found to have shortcomings at 28 of 76 audits inspected by the PCAOB. That's up from nine in the prior inspection. Problems were found at 12 of 54 KPMG audits reviewed, up from eight.

The two firms now have the opportunity to try to rectify the problems highlighted before any additional steps are taken by the PCAOB. Major audit firms are inspected annually by the board.

Of the problem inspections, which covered audits performed in 2009, and were tilted by the PCAOB toward the riskiest clients, two of PwC's were followed by a restatement of the financials by the companies in question. One more of the PwC audits singled out by the watchdog was later followed by "substantial adjustments" to the financial statements. The PCAOB does not disclose the names of the companies.

In a statement, PwC chairman and head partner Robert Moritz noted the rise and said the firm was "working to strengthen and sharpen the firm's audit quality, including making investments designed to improve our performance over both the short- and long-term."

In seven of the KPMG audits, the crux of the problem, according to the PCAOB report, was properly measuring and disclosing the fair value of "hard-to-value financial instruments" including private debt securities, collateralized mortgage obligations, and other mortgage-backed securities, according to the report.

The firm "failed to obtain sufficient appropriate audit evidence to support its audit opinion," the report concluded. No restatements were highlighted though in one case substantial changes were made to the financials after the audit.

George Ledwith, a spokesman for KPMG, said the PCAOB's inspection process "has played an important role in improving audit quality, and their insights have measurably helped KPMG as we work to continuously improve our audit performance and strengthen our system of audit quality control."

In the past KPMG has responded to reports by enhancing its guidance and tools for auditing fair value measurements and disclosures of financial instruments without readily determinable fair values, Ledwith said.

The other two auditing firms among the Big Four firms, Deloitte and Ernst & Young, were reviewed separately. Those reports have yet to be posted. ' Reuters

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