Audit Board Finds Fault with BDO Seidman

The accounting firm should have done more work to support its audit opinions for five of its clients, according to the PCAOB.
Sarah JohnsonMay 8, 2008

The Public Company Accounting Oversight Board found audit deficiencies at five of BDO Seidman’s clients in its latest round of inspections of the second-tier firm.

The complaints about BDO from the audit firms’ overseer include a failure to “adequately audit” a client’s recorded loss for a sold business and its goodwill-impairment analysis. It also criticized BDO for failure perform proper testing on other clients. “In some cases, the deficiencies identified were of such significance that it appeared to the inspection team that the firm, at the time it issued its audit report, had not obtained sufficient competent evidential matter to support its opinion on the issuer’s financial statements,” the PCAOB wrote for its 2007 inspection report, which was released on Wednesday.

The PCAOB auditors reviewed BDO’s work from June 2007 to January 2008 at its New York City and Chicago offices, its Center for Information Management in Grand Rapids, Mich., and seven other of its 35 U.S. practice offices. Because it has more than 100 publicly traded clients, BDO is subject to the PCAOB’s annual inspections.

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In this fourth inspection of BDO, the PCAOB for the second year in a row didn’t find errors that could be material to a BDO client’s financials. In the PCAOB’s 2005 report, in contrast, the board noted one case in which its inspection led to a restatement.

Still, it’s hard to say whether or not BDO’s audit quality has improved over time based solely on the public information the PCAOB provides in its reports. The PCAOB will not reveal how many audits it looked over for any of its inspections. and it concentrates on only a firm’s highest-risks clients. Indeed, its reports discourage readers from drawing conclusions based on the number of audit deficiencies and issuers listed.

As in prior responses to the PCAOB reports, BDO again takes issue with the board’s presentation. “The format of the report,” the audit firm wrote in its response letter, “does not lend itself to a portrayal of the overall high quality of our audit practice.”

The firm notes, though, that it has developed new tools and improved its training in order to address some of the matters noted by the PCAOB inspectors. BDO also admits that it supplemented some of its audit documentation or performed additional procedures after the inspections. “However, no new facts came to our attention that caused us to believe that our previously issued reports should be withdrawn,” the firm wrote.

Here are excerpts from the PCAOB’s findings on BDO’s 2006 audits.

Issuer A: The auditor failed to obtain sufficient evidence to support its audit opinion.

The issuer had several matters undermining its ability to realize deferred tax assets, including three years of cumulative losses that the issuer expects to continue for the next three years. The PCAOB implied that these negative factors should have outweighed the positive. In its response letter, BDO disagreed, contending that the report left out some information that led to its agreement with the issuer that the deferred tax assets would be realized in the future.

Issuer B: The auditor failed to adequately audit the valuation of the issuer’s inventory.

The board reported that BDO relied on the retailer’s reasonableness test for valuing its inventory based on a historical-cost-to-retail-value ratio derived from aggregated companywide data. The firm should have looked into how this ratio differed from the ratio for individual stores and tested the accuracy of the data used in computing these ratios, it asserted. BDO says it did conduct other valuation tests.

Issuer D: The auditor failed to sufficiently test the issuer’s trade accounts receivable.

BDO should have dug more into this client’s consumer credits, which, according to the PCAOB, were of significant amounts. Some of them were more than 120 days old at year’s end, according to the board.