GT did not go far enough in meeting audit concerns
June, 13th 2014
The Public Company Accounting Oversight Board has taken Grant Thornton’s US practice to task over its failure to sufficiently address quality control issues raised during the 2008 and 2009 audit quality inspections
It has published previously confidential criticisms of the firm from both reports because, it says, the firm did not carry out adequate remedial work during the requisite 12-month period following publication.
However, it has accepted the work GT carried out to meet concerns raised during the 2010 inspection, so the details of those complaints will remain non-public.
In the 2008 report, the US watchdog says that there were concerns over the effectiveness of the firm’s quality controls relating to auditing accounting estimates and, in particular, to testing data and underlying assumptions.
For example, in one audit, the PCAOB inspectors found no evidence either in the audit documentation or elsewhere that GT had tested the reasonableness of future development costs data that the client company had used to develop its estimate of accumulated depreciation, depletion and amortisation of a significant oil and natural gas producing field.
The nature of many of the reported audit deficiencies provides cause for concern whether the firm applied sufficient professional scepticism when performing audits The board said, “The nature of many of the reported audit deficiencies provides cause for concern whether the firm applied sufficient professional scepticism when performing audits.”
According to the inspectors, in a number of audits, the engagement teams’ support for significant areas of the audit consisted of managements’ assertions or views, the result of inquiries of management or unaudited management analyses.
“The significance and volume of the reported audit deficiencies raise questions regarding the sufficiency, rigor and efficacy of the supervision and/or review activities of the engagement managers, partners and concurring reviewers…,” the report continues.
“In addition, the number of situations in which the firm asserted that important work had been performed but not documented, raises questions whether higher-level firm personnel could have adequately supervised and reviewed the audit work.”
The inspectors reiterated the latter comments in the 2009 report about weaknesses in GT’s quality controls in relation to testing internal control, evaluating management’s fair value measurements and impairment determinations, and assessing other significant management estimates.
In a statement, published at the same time as the PCAOB released the confidential details, Grant Thornton says that continuous improvement and high quality audits remain a top priority for the firm.
With reference to the 2008 and 2009 inspection reports, it says that although it did respond to the criticisms by taking what it thought at the time was sufficient action, it accepts now that “additional actions may have been warranted”.
“As a result, we have continued to invest in our resources, made and continue to make significant improvements to our tools and policies, and proactively self-assess our audit execution to identify ways we can continue to improve in order to deliver the highest quality audits.
“We look forward to continuing our constructive dialogue with the board and its staff with the common objective of continuous improvement in audit quality.”
In January, the PCAOB published another highly critical report on GT US's audit procedures, in which its inspectors revealed that they had discovered 22 audit failures out of 34 audits. In response, however, GT said that the audits had taken place before spring 2012 when the firm introduced revised ICFR audit methodology and training in direct response to concern that the PCAOB had expressed about the quality of ICFR auditing in general across the whole auditing profession.
"Those changes were in effect during our audits of 2012 financial statements and we believe have been effective in improving audit quality in this important area,” said GT CEO Stephen Chipman and national audit managing partner Trent Gazzaway.
In September last year, the PCAOB issued a report on audit work carried out by GT’s UK practice. This revealed that PCAOB inspectors had looked at three audits in which the firm had performed work on behalf of primary auditors.
One of them was found to have fallen so short of acceptable standards that the board was forced to conclude the firm had not fulfilled the objectives of its role in the audit.
However, the PCAOB makes clear in all its reports on firms – many of which reveal failings in firms’ audit work – that the fact that its inspectors have discovered deficiencies in aspects of a firm’s audits should not be taken as indicating the frequency of audit failure throughout the firm's audit practices.