Risk & Compliance

PCAOB: Deloitte Trusted Management Too Much

In a rare release of information about one of its inspections, the regulator noted deficiencies stemming from Deloitte's culture.
Sarah JohnsonOctober 17, 2011

In a 2008 inspection report, the Public Company Accounting Oversight Board questioned the level of skepticism that Deloitte & Touche auditors brought to their corporate audits. The board made that information public today, by releasing a section of the report that is usually hidden from public view.

“In too many instances, the inspection team observed that the [auditors’] support for significant areas of the audit consisted of management’s views,” the PCAOB wrote.

The board also acknowledged today that Deloitte may have since corrected the issues noted in the report.

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The PCAOB rereleased its 2008 inspection report with nine new pages that highlight quality-control problems at the accounting firm. The inspections were conducted at 18 Deloitte U.S. offices between March and November 2007.

The board has never before released this section of its inspection report for a large accounting firm. Firms that have upward of 100 publicly traded clients, including Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers, are subject to annual PCAOB reviews. However, only smaller firms, which have triennial reviews, have thus far been subject to having these criticisms made public.

In the extended version of the report, the regulator’s inspectors found that Deloitte’s auditors did not do enough testing when they evaluated a company’s estimates or looked at the valuation of investment securities. For example, the PCAOB noted, the auditors “did not obtain sufficient competent audit evidence” to support management’s projections for future financial results that went against historical results. “These deficiencies may result, in part, from a firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis and collection of objective evidence, and that rely largely on management representations,” the PCAOB wrote.

The board also noted several “causes for concern” about Deloitte’s quality controls, including audit procedures on income-tax balances and reviews of the work of specialists.

The PCAOB gives auditors 12 months to remediate any problems before the regulator would release the information about quality control. Accounting firms can receive even more time if they dispute any findings with the Securities and Exchange Commission, which oversees the PCAOB.

The release of Monday’s information “does not signify anything about the merits of any additional efforts a firm may have made to address the criticisms after the 12-month period,” the PCAOB said in a statement.

For its part, Deloitte says it has been working on improving its audits. “We have complete confidence in our professionals and the quality of our audits, and agree that there were and always will be areas where we can improve,” said Joe Echevarria, who became Deloitte’s CEO earlier this year, in a statement provided to CFO.

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