At Deloitte, More Pain Before Any Quality Gain

At Deloitte, More Pain Before Any Quality Gain

The PCAOB, the audit industry regulator, shamed global audit firm Deloitte recently when they exposed the private portion of the inspection report of the firm's 2006 audits. It was the first time that had happened to one the Big Four audit firms, the largest firms that audit the vast majority of publicly listed firms in and out of the U.S..

I'm sure Deloitte, and the rest of the Big Four, thought the PCAOB would never have the nerve.

re: The Auditors has seen a confidential, internal Deloitte training document, prepared this past summer, that reveals the firm expects the worst when the inspection reports for their 2009, 2010, and 2011 audits are published by the PCAOB. The 2009 report should be out by the end of this year. The training document also shows how difficult it is for Deloitte leadership to steer the largest global firm away from the "audit failure" iceberg.

It seems audit competence and capacity to audit complex topics are in short supply at all the firms, based on PCAOB inspection results for audits conducted during the financial crisis period and the reports for 2010 audits at PwC and KPMG released recently. Deloitte has been particularly hard pressed to maintain audit quality since the firm lost several engagements that would have helped to grow specialized knowledge and retain experts. Big clients like Merrill Lynch, Bear Stearns, and Washington Mutual helped pay the bills for subject matter experts and quality control but those revenues were lost to financial crisis failures and forced combinations with better capitalized, non-audit client banks.

I think the PCAOB decided to publicly criticize Deloitte for two reasons.

  • The firm has been piling on the negatives via a $1,000,000 fine/disciplinary sanction as a firm for a previous issue, two high level insider trading scandals (Flanagan and McClellan), the failures and frauds of Deloitte China clients CCME, Longtop and now Focus Media, and the specific failures of major clients during the crisis (Bear Stearns, Merrill Lynch, WaMu, and Royal Bank of Scotland, to name a few).
  • Deloitte had was resistant to the inspections, resistant to the criticisms, and unwilling to make changes based on the PCAOB's requests. If you can't fix something that's one thing. If you won't and thumb your nose at the regulator, you are getting close to Arthur Andersen-like behavior.

We know how that story ended.

Read this article in its entirety at the re: The Auditors, a blog by Francine McKenna.

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