For the second round of official inspection reports on the Big Four audit firms, the Public Company Accounting Oversight Board's findings led to a handful of negative headlines: "Audit Watchdog Report Raps Ernst, KPMG," "Deloitte Criticized by Board," and "Failing Grades for E&Y, KPMG." According to critics of the way the PCAOB has shared information about its inspections process, those descriptions don't paint a clear picture about what the auditor overseer was probably trying to say in its reports. In addition, they say, the reports came out too late to truly tell how the audit firms are currently performing.

To be sure, the PCAOB's critiques of the Big Four's 2004 audits list several mistakes for each firm — specifically, the board found deficiencies in the audits of 9 PricewaterhouseCoopers clients, 10 Ernst & Young clients, 11 KPMG clients, and 17 Deloitte & Touche clients. Except for PwC, each firm had at least one error that appeared "likely to be material to the issuer's financial statements."

Using the terms "failed" and "failure" numerous times, the PCAOB cited the firms for basic accounting issues, some of which relate to lease and tax accounting, revenue recognition, and goodwill-impairment testing. All four of the reports, and the PCAOB's previous evaluations of the Big Four's work, noted that in some instances the firms did not "identify or appropriately address errors in the issuer's application of GAAP." The inspections led to restatements for one client of each auditor (two, in KPMG's case). The bulk of the board's criticisms were related to the auditors not properly documenting their work.

Despite an emphasis on "criticism of a firm's policies, practices, and audit performance" and staying away from reporting on a firm's strengths, the reports are intended to be solely a "dialogue" between the PCAOB and the firm, the 2003 inspection documents said. Much of this dialogue, however, is available on the PCAOB Website for anyone to review. And while releasing the information publicly is part of the mandate of keeping investors better informed under the Sarbanes-Oxley Act, the reports may, at first glance, skew public perception. The PCAOB rolled out the 2005 public reports starting in late November; the last two were released on January 11.

In fact, the reports' negative tone is missing context, according to accounting experts who spoke to CFO.com about the PCAOB's findings. Part of this ambiguous perspective arises out of the fact that the board won't say how many inspections it conducts on each firm. "It's unclear how to interpret the reports without knowing the number of audits they looked at," says James Bierstaker, an associate professor in Villanova University's accountancy department.

Keeping that figure private doesn't protect the audit firms, says Susan Lister, national director of audit policy at BDO Seidman. But including it could encourage investors and potential audit clients to draw the wrong conclusions since the reports are missing so many other facts necessary for forming an opinion. For example, the PCAOB keeps the identities of the audited companies confidential because of Sarbox requirements and doesn't even include basic descriptions of the issuers, such as revenue size. The PCAOB's "comments are really generic, so it's hard [for the public] to put them into perspective at all," Lister told CFO.com.

"I think the process is well intended, and it is helpful and constructive, but right now it is not producing the kind of results that it should for people who are using the results and trying to understand what this means," says J. Michael Cook, the former CEO of Deloitte, who chairs four audit committees, including Dow Chemical's.

Regarding the 2004 inspection reports, which the PCAOB released publicly in the fall of 2005, newspapers widely reported that inspectors had found 19 audit deficiencies out of 76 audit engagements at KPMG. For the 2003 evaluations, which the PCAOB termed "limited inspections," the regulator looked at "portions of 16 audit engagements" for each firm.

The 2005 Big Four reports are missing those types of facts, which are irrelevant, according to Charles Niemeier, a member of the PCAOB. "In some respects, [the number of engagements] could encourage misleading, superficial comparisons between firms," he said in written responses to questions submitted by CFO.com. While planning inspections, the PCAOB does not decide beforehand how many audits it will review, and it doesn't look at any one audit in its entirety, he added.

The board's 2005 reports did reveal that it reviewed portions of more than 365 audits performed by the nine largest firms. But given the gulf between the Big Four and the next five audit firms, that number leaves observers guessing about the percent of audits reviewed. Ernst & Young, for example, audits more than 2,300 U.S. public companies, while Grant Thornton, considered by some measures to be the sixth-largest audit firm, audits approximately 372.

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