PCAOB Hands Big Four ”a Little Fear”

Auditor-watchdog group discovers serious accounting problems at the largest audit firms.
Stephen TaubJune 28, 2004

The Public Company Accounting Oversight Board (PCAOB) has unearthed “significant audit and accounting issues” in audits conducted by the Big Four accounting firms, PCAOB Chairman William McDonough reportedly told a House subcommittee last week.

The head of the federal auditor-watchdog group told lawmakers that Ernst & Young, PricewaterhouseCoopers, KPMG, and Deloitte & Touche, had agreed to voluntary limited inspections of several “high-risk” client companies with complex finances, according to the Associated Press.

PCAOB found in its preliminary inspections that the audits of the firms leave “room for improvement,” McDonough reportedly said.

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The chairman did observe that there have been signs of positive change in “the tone at the top” at the largest accounting firms. However, it’s less clear that the thousands of partners below the top executive levels all grasp the lessons of the accounting scandals of the last few years, according to AP’s account of his testimony.

Starting this year, the PCAOB will conduct annual inspections of the largest accounting firms. “We expect the prospect of scrutiny to alter the relative risks and rewards to individual [auditors] who might otherwise consider short-cutting audit steps or bending to pressures to please clients,” McDonough said, according to the wire service.

Under the PCAOB’s mandate, accounting firms have 12 months to correct problems and violations discovered in the course of the inspections. During that period, the board will not publicly reveal alleged lapses unless it comes across egregious cases.

If a violator resolves its problems, the PCAOB will not take any further action. If not, individual auditors could face civil penalties up to $750,000, and firms could be tagged penalties of as much as $15 million, according to AP. Audit firms could also be hit with temporary suspension of its ability to audit public companies or permanent disqualification of that right, according to the AP.

The PCAOB “has spread a little fear, and Chairman McDonough has hit the proper tough-but-fair tone,” Rep. Michael Oxley (R-Ohio), chairman of the House Financial Services Committee, reportedly said at Thursday’s hearing.