PwC and KPMG Inspection Reports Make Us Wonder: Are Shoddy Big 4 Audits Here to Stay?

Have we mentioned how much we enjoy the PCAOB releasing inspection reports and/or making big announcements the week leading up to a major holiday? No? Oh yes, it's right up there with root canals and saddle sores. But it's their labor of love so we'll share the news with you.

Today, the Board released the 2012 inspection reports for PwC and KPMG, the last of the Big 4. Compliance Week has lowdown:

KPMG got a failing grade on 17 of 50 audits inspected by the PCAOB for an overall failure rate of 34 percent, up from a 22.60-percent failure rate in 2011. PwC took heat for 21 of 54 audits inspected for a rate of 38.9 percent, down only barely from last year's rate of 41.3 percent. Among the Big 4, EY turned in the worst rate of 2012 at 48 percent while Deloitte fared the best at 25 percent. Deloitte is the only Big 4 firm to register a significant improvement from 2011 to 2012, perhaps explaining what PCAOB member Jeannette Franzel meant when she said recently the board is seeing "limited improvement" in inspection results.

If you glossed over that, here's the final tally for the Big 4's failure rates:
  • Deloitte 25%
  • KPMG 34%
  • PwC 39%
  • EY 48%
If you prefer source documents, read the reports for yourself on the following pages. If you want quick and dirty, go read the CW article or Accounting Today's piece. Here, we're going to attempt a discussion of what the hell all this means.
 
Ths short answer is: not much.
 
The slightly longer answer isn't really an answer at all. It's more of an assessment of what the value of these inspection reports is and if they're having the desired effect on the audit firms. 
 
The answer, again, is not much. 
 
Here's the statement from Vin Colman, PwC's head of assurance, responding to the inspection report:
"Simply put, audit quality is our top priority and we are committed to continuing our significant audit quality investments. Our investments, together with the efforts of our partners and staff, have successfully enhanced audit quality overall at PwC. We greatly value the PCAOB's insights and look forward to continuing our work with the Board and inspections staff in our ongoing efforts at audit quality improvement."
You get the sense that both sides have fanciful perspectives of their roles — the PCAOB as the ambitious regulator eager to improve things for stakeholders, including the firms that report to them; the firms as the stewards of financial reporting, eager to comply in the best way they know how.
 
But that's not it at all. Both sides have different ideas about what "audit quality" is and how firms should be interpreting auditing standards and as it stands right now, they both seem steadfast in their thinking, so what we end up with are these poor results. I mean, none of these firms are even close to what a reasonable person would want to see from the most prestigious audit firms on Earth. I don't know what the magic number is, but it's sure as hell not 25%. That's poor quality. 
 
Except, what is "poor quality" and what are the consequences of it? Will the audit committees at ExxonMobil or JPMorgan look at these results, ring up Vin Colman or Bob Moritz and say, "Gosh, guys. That's another lackluster performance. We're rethinking our options." Of course not. They'll gladly pay their fees and PwC will gladly keep their most prestigious clients, and get ready for next year's engagement. Oh sure, the PCAOB might decide, again, to release Part II of the inspection report, which amounts to mild embarrassment for the firm but, again, no real consequences will actually result.   
 
And then there's the question of how to measure "audit quality." Is one defiency out of fifty "high quality"? Is ten in fifty "high quality"? At this point I suppose we'd all think so but it would still kinda suck.
 
Audit quality, to me anyway, is just a made-up phrase that doesn't have any practical meaning. As long as the PCAOB measures the results in deficiences out of the total number of audits inspected, and as long as the firms and the Board disagree on what constitutes a quality audit from a pile of crap, we're going to be stuck with a bunch of sub-standard results from a sub-standard regulatory process. 
 
Ugh, this stuff is exhausting. Maybe that's why the Board releases these things right before a holiday — we all need the rest afterwards. 

2013_PwC

 

2013_KPMG

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