August 21, 2018

PCAOB Inspection Report Shows That EY’s Auditing Is Still Bad

Maybe you've noticed, maybe you haven't, but PCAOB inspection reports have loads more information in them than they used to. They have several tables that summarize deficiencies by audit standards, financial statement accounts/audit areas and industry.

They also throw in pie charts to show the breakdown of the industries and revenues ranges of the companies whose audits were selected for inspection. The new and improved inspection reports aren't quite the page-turners like, say, your average dishwasher installation manual, but it would be remiss of me to not remark on how marginally more enjoyable they are to read than they've been in the past.

Now, then. EY's 2014 inspection report is not good. It's not as not good as last year, and it's not as not good as the year before that, but it's not good. It might be fair to say that the Black and Yellow still doesn't quite get auditing, or perhaps it's more accurate to say that they don't quite get auditing the way the PCAOB thinks they should get auditing. I invite you to go read the entire inspection report if you've been having trouble sleeping, if you just popped an Adderall or if you genuinely care about the results. 

For those of you looking for the quick and dirty, a couple of the aforementioned tables should suffice.

Let's start with the "Financial Statement Accounts or Auditing Areas Related to Identified Audit Deficiencies":


Holy shnikies, that's a lot of AS5. And, for whatever reason, auditing revenue seems difficult.

Couple that with this table (only the top third, it stretches on for two pages) that shows how many deficiencies, per issuer, per standard:

Wow, okay.

The report states that the number of audits with deficiencies was 20 out of a total of 56 audits inspected. However, as you can see, each issuer with a deficiency had multiple deficiencies per audit. If you look at the remainder of the second table, it appears that Issuers B, C and D had the most trouble.

But overall, wow, AS5.

EY Managing Partner Steve Howe and Vice Chair of Assurance Francis Mahoney responded to the report on behalf of the firm, saying, "We have thoroughly evaluated the matters described," and "have taken actions to address findings." Yes, it's verbatim to last year's response.  

Whether or not you consider this year's inspecton report an improvement over last year's horrendous report all depends on whether you consider these new tables to be informative or not. Obviously fewer issuers with deficiencies is an improvement, but the gory details kinda make you think that all these details make this year's report worse.

If you see anything else interesting in the report, shout it out. Plus, share your thoughts on EY's auditing ability, the PCAOB's auditing ability of EY's auditing ablity and anything else relevant below.

[PCAOB]

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PCAOB: The Rodney Dangerfield of Bureaucracies

pcaob.gif It’s tough being part of a bureaucracy, especially if you’re doing something as glamarous as babysitting auditors. The CIA, FBI, NSA have got it easy. You get to catch bad guys, use guns, and Hollywood makes movies about you. Aside from the warrantless wiretaps and otherwise general big brotherishness, it’s cool.
The PCAOB doesn’t get that luxury. They get to poke around auditors’ work and then tell them how much they suck at it. Not so fun for anybody. They also get to write auditing standards. Take the watchdog aspect, multiply it times infinity, and that’s about the amount fun we’re talking about for writing rules on auditing.
But now people are saying they’re too slow in writing these I-already-want-to-kill-myself boring rules? Yep:

“Given how little they’ve accomplished in the standards-setting area, they don’t get a passing grade,” says Lynn Turner, a former chief accountant for the SEC.
Turner says he and a group of investor advocates wrote to the PCAOB in 2004, asking it to improve fraud standards. But the work remains undone, he says.
Bill Gradison, the board member whose term expires in October, calls the criticism fair. “We’ve been much slower than other standards writers,” he says.
By comparison, the International Auditing and Assurance Standards Board, which sets international auditing standards, among other duties, finished revising its own standards in March. The process, which included 37 standards, took about five years

Man, now comparisons to the Europeans. They’re looking for some new blood at the PCAOB though, since Mark Olson is retiring as Chairman and another board member’s term is expiring.
But don’t you go calling them lazy! “the PCAOB is taken seriously by the auditing community and deserves credit for trying. ‘Anyone who says it isn’t is off the wall,'”
What a ringing endorsement.

COMPLIANCE WATCH: Oversight Board Sets Sluggish Pace
[WSJ]

PCAOB, We Need to Have a Talk

pcaob.gifPCAOB, we here at Going Concern want to help you get some respect. We really do.
We don’t think it’s fair that people think you’re slow at writing rules for auditors. Okay, maybe you could pick up the pace a little bit but we know that it takes a lot of work and patience to write those rules. But then we heard about this and we want to let you know that we aren’t angry, you’re just letting us down.
Reuters:

The U.S. audit watchdog voted on Thursday to defer its first inspection on 49 foreign auditors in areas such as the European Union, China and Switzerland for up to three years.

Like we said, we’re not mad. We’re disappointed.

US PCAOB delays 1st review of 49 foreign auditors
[Reuters]