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Current Events and Commentary

Big Four Firms Still Get Poor Grades, But Improve Over Past Failures

October 2007
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Each of the Big Four firms is inspected annually by the Public Company Accounting Oversight Board (PCAOB). Recently, the PCAOB issued the last of this year’s inspection reports, and their third annual report, for each of these firms. Together, these four firms audit about 99 percent of all public company revenues. The Big Four firms are Deloitte, Ernst & Young, KPMG, and PriceWaterhouseCoopers (PWC).

Sadly, the large accounting firms again had difficulty meeting the regulator’s expectations. Here is a summary of the inspection results for those engagements where the PCAOB concluded that the audit firm had not gathered sufficient competent evidence to support the auditors’ opinions issued with the Securities and Exchange Commission:

  Deloitte E&Y KPMG PWC Totals 
2007 Report on 2006 Audits
Number of Audits with Unsupported Opinions 8 8  7 6 29  
Number of Financial Statement Restatements required by the lack of audit work 1 0 0 0 1  

Although the above results are far from perfect, they were considerably better than the results identified in the first two reports. This improvement is more a commentary on the dreadful results obtained in the PCAOB’s earlier reports, which are summarized below:

  Deloitte E&Y KPMG PWC Totals 
Report on 2005 Audits
Number of Audits with Unsupported Opinions 17 10  11 9 47  
Number of Financial Statement Restatements required by the lack of audit work 1 0 0 0 1  
Report on 2004 Audits
Number of Audits with Unsupported Opinions 8 8  19 30 65  
Number of Financial Statement Restatements required by the lack of audit work 5 2 3 5 15  

As is the PCAOB’s practice, none of the corporations whose audits were questioned is mentioned by name.

The Sarbanes-Oxley Act limits the public availability of the PCAOB’s criticisms of each firm’s quality control system IF the firm is able to address such concerns within twelve months of the inspection report. Because of this, the public reports just issued did not include (i) details of the PCAOB’s findings, or (ii) a discussion of each firm’s quality control system. So far, the PCAOB has not provided any such details for any of the Big Fours firms, thus implying that the PCAOB is satisfied with the progress that has been made.


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