PCAOB Pings Grant Thornton on Lax Testing

In its latest inspection report on the second-tier firm, the auditor watchdog notes several instances of insufficient probing.
Sarah JohnsonApril 15, 2008

Grant Thornton didn’t do enough testing to support some of its 2006 audit opinions, according to the Public Company Accounting Oversight Board’s most recent inspection report of the second-tier independent audit firm.

Released on Tuesday, the report says Grant Thornton failed to test the effectiveness of controls, data that had been provided to actuaries, and assumptions made by management.

Without specifically addressing each of the PCAOB’s concerns, Grant Thornton acknowledged in a letter included in the report that it had performed additional procedures or supplemented its documentation after the inspections concluded. However, it wrote, “None of the findings resulted in a change in our original overall audit conclusions or affected our reports on issuers’ financial statements.”

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The tone of Grant Thornton’s one-page letter is more subdued than its response to the PCAOB’s previous inspection report. Last June, the firm took a defensive tone and accused the PCAOB of including a factually inaccurate finding in its report. In addition, the firm wrote, “We strongly disagree with the use of overly broad comments such as ‘failed to identify,’ ‘failed to perform.’ They do not adequately describe all of the relevant facts nor do they acknowledge the extent of the procedures that were, in fact, performed by the engagement teams.”

This year, the firm merely notes that the complex nature of accounting and auditing standards brings up the “critical need to apply professional judgment when performing auditing procedures and reaching conclusions, particularly on the extent of testing and appropriate documentation or the application of accounting principles.” The firm further calls the PCAOB’s comments “constructive” and “helpful.”

With more than 100 public-company clients, Grant Thornton is subject to annual PCAOB inspections (firms with fewer clients than that are reviewed every three years). This latest report makes note of issues for the audits of five of Grant Thornton’s clients. It redacts many specifics about those audits, including the names of issuers, what the inspection team found — if anything — related to the audit firm’s quality-control system, and the number of total audits evaluated. The board does say the inspection team did field work in the firm’s national office and 14 of its 50 practice offices.

In one instance, the PCAOB says Grant Thornton should have considered other factors when reviewing a goodwill impairment test done by “Issuer C.” The issuer had concluded that impairment did not exist for one of its business units after calculating its fair value using the fourth-quarter average market price of the issuer’s stock and a premium attached to the value of the enterprise’s control over the unit. The PCAOB suggested that the issuer should have considered using its year-end stock price (rather than the average) without the control premium, which would have resulted in a lower valuation of the unit.

For Grant Thornton’s work for “Issuer D,” the PCAOB says the auditor provided no proof that it had tested historical financial information the issuer had given to a valuation specialist or that it had evaluated its client’s assumptions for future taxable income when it evaluated the recoverability of deferred income tax assets.