PCAOB Knocks McGladrey on Loan-Loss Reserves

The audit firms' oversight body found several deficiencies at seven of McGladrey's clients last year.
Sarah JohnsonMay 8, 2009

The Public Company Accounting Oversight Board’s latest inspection report on McGladrey & Pullen criticizes the firm’s reviews of some of its clients’ allowances for loan losses.

The firm “failed to perform sufficient audit procedures” when testing client accounting for the reserves, the PCAOB writes. For example, the firm used a skewed population of loans, so its evaluation of whether its client had properly identified substandard loans was off. For another client, McGladrey should have limited the extent to which it relied on the work done by the client’s credit-review team.

Overall, the report, which was published Thursday, notes audit deficiencies at seven of McGladrey’s clients from inspections conducted late last year. Those deficiencies “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 audit firms’ regulator writes.

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But the PCAOB warns readers of the report against drawing conclusions about McGladrey’s overall performance based on the deficiencies. The board doesn’t reveal how many audits its inspectors reviewed; the inspections took place between August and December 2008 at the firm’s national office and 8 of its 83 U.S. practice offices. (The PCAOB inspects U.S. public-company auditors with more than 100 issuers every year.)

In response to the PCAOB’s findings, McGladrey did more audit work and supplemented its work papers, the firm reports in a letter to the PCAOB dated April 23. Still, “none of the inspection comments resulted in the restatement of financial statements,” the firm says.

The PCAOB redacts its conclusion about each audit firm’s quality-control systems as long as the firm fixes the systems within a year. The regulator also omits the issuers’ name, referring to them by a letter of the alphabet. However, the board does provide some insight into each significant audit deficiency its inspectors find at each firm. Here are excerpts from the PCAOB’s findings on McGladrey’s audits:

Issuer A: The auditor failed to perform sufficient procedures concerning the valuation of investment securities. A McGladrey-hired specialist came up with two different fair values of securities that were both lower than the issuer’s estimates. McGladrey didn’t know why the specialist had changed his or her estimate nor fully grasp the methods and assumptions the specialist had used.

Issuer B: The firm failed to sufficiently evaluate the reasonableness of specific impairment reserves. For one of three large impaired loans used to test the client’s overall impaired-loan population, the firm didn’t test the sources of data and the reasonableness of assumptions used to make a fair-value estimate.

Issuer E: The firm failed to perform sufficient procedures to test the existence of revenue. In addition, the firm’s sample size to confirm accounts receivable was “insufficient to achieve the necessary level of assurance.”